I am very good at eliminating myself from the equation in many facets of my life. That is, when it comes to things where I know I am deeply fallible and perhaps even ignorant, I try to automate it thereby reducing the impact of my own worst enemy – ME. The NCAA tournament bracket is just one example of something I do every year that I know I don’t know much about so I turn to an automated process. I know that winning the bracket is part luck and part playing the odds. And if you can increase your odds the luckier you’ll get.
I often talk about knowing yourself, knowing you’ll be wrong, knowing you don’t know everything, etc. When harnessed, this is a powerful understanding. Understanding your own ignorance will actually make you MORE intelligent. With the tourney, I know I don’t know everything so I automate the selection process through a wonky quantitative process that takes my personal analysis out of the equation. For instance, if I just went with my own biases I’d pick Georgetown every year and I’d lose every year. This year I have them losing to Florida in the third round of the tournament. I don’t really care. It would be great if my alma mater won, but you don’t increase your odds of winning anything by letting your emotions and inherent biases cloud your judgement.
Portfolio construction shouldn’t be much different. You should have a process guided by rules within an overarching plan. Of course, discovering a plan that works is easier said than done, but letting your own worst enemy constantly change the rules of the game as it goes along is a certain road to catastrophe.
PS – Lousville will beat Florida in the final.
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.