Einstein was once asked that if he had one hour to solve a problem that would save the world, how would he go about it? His advice was to spend 55 minutes defining the problem, to leave a comfortable 5 minutes to arrive at the solution.
This may sound a bit geeky but the more I think about this, the more I like it. For example, I recently was in discussion with a consultancy client who was in a quandary about which fund should be selected to replace an underperformer. The answer only become clear once we had clarified exactly what role the existing fund had within the wider portfolio.
There are around 300 funds in the Square Mile Academy of Funds, any one of which could be included in the discretionary portfolios that I oversee. However, we manage these portfolios with both a well-defined investment objective and clear underlying investment philosophy. Each position in the portfolio has an assigned role and an appreciation of what can be expected from that type of fund. This process often tends to narrow down the list of potential funds to 2 or 3 ideas. The ultimate decision of which fund to use lies with the senior fund analyst within the team.
The key to ensuring a path to such simple decision making is by defining an underlying philosophy and a general aim. With these in place, and coupled with knowledge and some experience, hurdles can be overcome and seemingly tricky decisions made. Success in investment often rests upon these first principles. Sadly so many, both in investment and in life, fail to discover the clarity that a firm foundation can bring.
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