In The Heat of The Moment
Back to our friend Mr. Montier. Lots of good stuff here. Perhaps because we can easily identify with ALL (we have no shame) of these behavioral potholes!! But making mistakes, and recognizing them as such, is part of the learning process. And one thing we’ve learned over the years (besides that we’ve had plenty of opportunities to learn from mistakes) is that removing emotion from investment decisions is an absolute necessity within a disciplined investment process. It is for this reason, that we start each week, month, quarter, and year with a “playbook” for the upcoming game. Making decisions during the game results in emotional reactions. Sticking with your playbook, which has been carefully drafted and logically thought through by Spock rather than McCoy, provides us with much improved odds of success.
Montier recommends that investors learn to follow the seven P’s – “Perfect Planning and Preparation Prevent Piss Poor Performance.” He goes on to offer up a strategy from Sir John Templeton described by John’s great-niece in, Investing the Templeton Way:
There are clear psychological challenges to maintaining a clear head during a sharp sell off. One way Uncle John used to handle this was to make his buy decisions well before a sell off occurred. During his years managing the Templeton Funds, he always kept a “wish list” of securities representing companies that he believed were well run but priced too high . . he often had standing orders with his brokers to purchase those wish list stocks if for some reason the market sold off enough to drag their prices down to levels at which he considered them a bargain.
In October of 2008, with the market crashing to what we deemed “panic lows” amid rampant fear and excessive volatility, we put this component of our play book into place. By selling put options on securities we hoped to own at lower prices we allowed Spock to make our purchase decisions, rather than hoping McCoy would have the ability to “invest while terrified.” Importantly, with option premiums priced very richly, we were also paid handsomely to hold ourselves out as willing buyers of securities we were happy to own anyway.
In March of 2009, we then shared the piece below with our Board, authored by GMO’s Jeremy Grantham. With markets some 57% below their peak of 2007, GMO’s Chief Investment Officer offered investors some extremely timely advice that “there is only one cure for terminal paralysis: you absolutely must have a battle plan for reinvestment and stick to it.” Montier also notes Seth Klarman’s simple advice for removing the sources of forced decisions during difficult times:
One of our strategies for maintaining rational thinking at all times is to attempt to avoid the extreme stresses that lead to poor decision making. We have often descrived our techniques for accomplishing this: willingness to hold cash in the absence of compelling investment opportunity, a strong sell discipline, significant hedging activity and avoidance of recourse leverage, among others.