Pennsylvania Investment Observer

Decisions, Decisions, Decisions

by Daniel J. Nestlerode

I am often awed by people who come into my office with a stack of certificates and a large ledger notebook with dividend and split records spanning twenty years or more. Surely, someone put a lot of time in keeping such wonderfully detailed and accurate facts and figures about their portfolio. In other words, they did a wonderful accounting job. But by the time that I get to see such handiwork, something has changed and the records are no longer being kept, at least not as well as they used to be kept. Furthermore, it has dawned on someone that record keeping is not portfolio management. It is necessary to keep records to facilitate portfolio management, but record keeping by itself ignores the crucial decisions at which each portfolio manager needs to excel. That is, making the right decisions as the right time.

Good decision making is a skill that good portfolio managers have worked on over many years. Yet for many investors decision making is often the last thing that is examined and generally comes after many hours pouring over the ledger sheets or an excel spreadsheet on a computer. Why is this? Many of us have been taught how to do accounting and we understand the process and its benefits. I am no exception, having had a couple years of accounting study at Penn State many years ago. The course that was missing for me was Decision Making 101. Apparently it was missing for Penn State also, because it wasn’t part of the studies for a business major in the mid 1960s. As a result, many folks who run their own portfolios do wonderful accounting and haven’t got a clue about good decision making.

For many of us, decision making is an emotional process. We got married to the person that we love (an emotion). So our marriage, at least our first marriage, was based on emotions. That being the case, it is probably no wonder that half of the marriages end up in divorce. The divorce decision is probably also based on an emotion, just a different one than love. At some point we chose a career and were told to do something we liked to do. In other words, we were told to base our life’s career on another emotion, what we liked. By now you must know where I am going with this. Most of us select our investments based on what we like or believe that we understand. In other words, we buy and sell securities based on our emotions. Sometimes this procedure works out fine, yet other times the basis for our decisions is at best faulty. Because we do not have any other process on which to base our decisions, most people have never examined any other process on which to base decisions.

There is another process called grounded assessments. Assessments are our opinions about some situation or circumstance or how some stock will perform in the future. Clearly, we cannot know the future with certainty. If we could, I wouldn’t be writing this article for you now. Yet we can base our assessments or decisions on facts that are not in dispute. This is called making a grounded assessment or basing our decisions on assertions or facts. Please notice that there is little room for emotions in this conversation.

Fundamental and technical analysis of the stock market and individual stocks are processes at making grounded assessments of the prospects of an investment based on the facts surrounding the investment. Grounded assessments as a decision making process, while different from the emotional basis for decision making, is not fool proof. Yet the odds are better for making profitable decisions with grounded assessments than with emotional based decision making. At the very least, you have the facts of the situation on your side.

So the next time you are pondering your buy and sell decisions, consider the process you are using to come to a decision. If you want to employ a better process, call your investment advisor and request that he or she make a grounded assessment of your situation. It might not be right, but the likelihood is that the results will be more favorable over time than your emotionally based decisions.

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