Street Dogs

ALL investment decisions are framed by beliefs about appropriate objectives, about how to assess opportunities, and about how to organise an investment programme. Our beliefs can determine what we pay attention to and what we consider important.

But belief systems resist change. This can be a good thing if the belief system "works". Sometimes, however, belief systems need to change. In a rapidly changing world, adapting to and even anticipating change is necessary. This means that some beliefs that previously helped an investor to excel may become dysfunctional.

The first step to proactively managing beliefs is to become more aware of them. Writing your beliefs down, reflecting on situations that surprise you, and exposing yourself to different beliefs are all useful for identifying and clarifying beliefs.

Cross-referencing beliefs with investment theory is also a useful belief-management tool. Theory can bring focus to the issues that must be judged and can identify data that, if gathered, would narrow the range of uncertainty in those judgments. Of particular help in investment management is "inverted" efficient market theory, which simplifies all the possible reasons for superior performance into a focused question: how does a manager trade before his point of view is reflected in prices?

An investor who is serious about generating superior performance ought to be serious about self-assessment. Such an investor should be driven to find tools and data that will enable objective self-assessment. At the very least, they should benchmark themselves.

Adapted from a paper by John R. Minahan