PP4: Focus On the Big Picture

The last of the Principles of Perpetual Prudence is to focus on the big picture. Always focus on the bigger picture and have it in mind before doing anything. This allows you to maximise your returns relative to resources committed, prevents the problems associated with being too detail-orientated, and is aligned with our principle-focused approach to retail investing.

Wasted resources

When you participate in retail investing you’re actually making two separate investments. Sure, you invest in shares, bonds, real estate, options, shitcoins, etc. but you also invest your time, energy, and mental focus into the act of deciding how to invest.

The second type of investment has a return associated with it like the first. The more personal resources you put into your investments, the lower your return on these resources is likely to be. 

There is a way to maximise this return. By learning to apply the pareto principle to retail investing, you can get most of the gains of directing resources to the activity with a small fraction of the commitment.

Getting into the weeds

I would actually go one step further.

It seems to me that those that spend more and more time thinking about investing can end up over-thinking, over-committing, over-paying…but not over-performing. This happens because your ability to generate returns does not increase at the same rate that you learn. This increase in knowledge probably increases the amount of time and money you think you have to commit to investment decisions (and your confidence in these decisions), but this often doesn’t translate to increased returns.

Again, changing x does necessarily lead to the same changes in f(x). In fact, this increase in knowledge can lead to worse returns. Higher confidence in decisions leads to over-exposure in positions. It also typically results in over-trading with the resulting costs harming returns. It may be the case that returns are actually concave to information.

Local maxima

But it’s not just increased information that can harm. Ingesting the wrong type of information can have the same effect. Focusing on details and small wins can get you in trouble.

Anytime you focus on small gains and optimisation you run the risk of arriving at a local maximum.

Purely focusing on the next step and the immediate environment means that you neglect exploring the search space. This is one of the reasons why you need to maintain a broad view. If you focus on the pennies, you lose track of the pounds.

Source: https://expoundai.wordpress.com/2019/04/27/maxima-vs-minima-and-global-vs-local/
You don’t need to be the best

So, you don’t want to be committing a large amount of resources to this stuff (unless you’re a freak and you actually enjoy thinking about retail investing).

And you don’t have to.

Bear in mind that this isn’t your job. You are a graduate consultant/postman/actor/accountant/advertising analyst/writer (aka unemployed), not a professional investor. You don’t have to have massive returns, leave that to the professionals (who can’t generate them anyway). 

All you need is something that doesn’t take up too much of your time and energy that does the job. Something that minimises the probability of bankrupting you (in real terms) over all timescales.

Principles first

What could this something be and how would one go about finding/implementing it?

By starting with principles.

Worrying about optimising for tax efficiency, small differences in fees, choosing between two slightly different ETFs, etc. is irrelevant if your over-arching investment strategy is wrong. You can have an elaborate and sophisticated way to achieve a 0.5% extra net return but if your portfolio crashes 50% 6 months before your planned retirement, it doesn’t really matter.

A strong strategy is built upon strong principles. This is why it’s so important to get principles correct.

This means that principles warrant the most attention, examination, and explanation. You need an understanding of why you are using a set of principles.

This is where other resources come up short.

There’s almost unlimited information out there on how to do retail investing and personal finance. What no one else is really talking about, though, is why. Everyone is giving you tactics, a few are giving you strategies, none are giving you principles.

This is why you may feel that the explanations behind suggested actions are somewhat lacking, outside of deferring to authority figures and “established wisdom” or naive statistical analysis.

This, my friends, is why we’re here.