Sunday, May 17, 2015

Are You Suffering from Input Overload?
Think Digital, but Judge Analog.


Over the last week or so my wife Ruth and I have been with music lovers, including donors and professional musicians where much of the discussions have focused on the musical scores. The very term leads me to think of financial scores. Both are performance measures and there are well-recognized parallels between music, math/science and investing.

All three cultures contain enormous amounts of individual facts (and fictions masquerading as facts). If we paid complete attention to all of these our constrained brains would become overburdened. Instead we choose to narrow our focus to segments; e.g., nineteenth century symphonies, organic chemistry, or equity mutual funds. Even these segments are too large for individual attention, so we tend to array these participants in a statistical rank order. Thus, we become a captive of the digital world order.

Music favorites

In deciding which rendition of a piece of music is their favorite, people choose based on memories. What we may remember is the total effect of the last time we heard West Side Story or Beethoven's Fifth Symphony, which is the result of the orchestra, conductor, venue, acoustics, and importantly our particular location physically and emotionally. Since the sum total of these digital inputs can not be algebraically experienced, the resulting feeling of satisfaction is an analog reaction.

Successful investment choices

As much as it pains me to admit, my learning as a CFA® charter-holder has provided me with lots of decision inputs, but so far has not been much help in developing consistently winning portfolios.

While I may make imperfect projections of revenues, margins, tax rates, shares outstanding, earnings per share, relative valuations against markets, peers, growth rates, etc., the success of my investing for clients will be an analog of known and more importantly, unknown factors.

Unexpected or unusual combinations of  instruments

In most of our descriptions of Legacy Portfolio investments I have focused on equities or equity funds. However, in the hands of a skilled portfolio constructor/manager I could see the following other types of investments included: long-term commodity shortages, unimproved real estate, long-term TIPS, and currently unpaid royalties. When combined with investments in a combination of secular growers and the beneficiaries of disruption, any or all of these could make beautiful music together in the Legacy, the longest of my Timespan Fund Portfolios.

Question of the week: What lessons can you or have you learned from music?
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A. Michael Lipper, C.F.A.,
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