Decisions

 By Guest Blogger Doug Rowat

Last year, I dropped almost three grand on a high-end Mathew Barzal rookie card, the star forward of the New York Islanders. Unfortunately for me, over the summer of 2018, his teammate, and even bigger star, John Tavares was traded away to the Toronto Maple Leafs and Barzal, as of this writing, is a minus five and sits a dismal 57th place in overall league scoring. As a team, the Islanders have also struggled this season, adjusting not only to the absence of Tavares but also to a new head coach, and are currently out of a playoff spot. So, my rookie card purchase was a poor investment decision.

Or was it? When I made the purchase, Barzal was about to win the NHL rookie-of-the-year award by a landslide (past recent winners have included superstars Auston Matthews, Nathan Mackinnon, Evgeni Malkin and Alexander Ovechkin who all have much more valuable rookie cards), he had finished just outside of the top-10 in scoring (with almost as many points as some guy named Crosby), he was explosive, frequently recording five-point games (a true rarity in today’s NHL), he was young (only 21) and he was Canadian (North American players, for whatever reason, attract the most investor interest). In other words, it was the correct decision to buy the card, but simply the wrong result the following season.

The difference between the right decision and a poor result is an important distinction and is something that former professional poker player Annie Duke emphasizes in her excellent new book, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts. To highlight this distinction, Duke examines Seattle Seahawks coach Pete Carroll’s much-criticized decision during the 2015 Super Bowl to call for a pass play at the New England Patriots’ one-yard line instead of giving the ball to star running back Marshawn Lynch. Of course, the pass was intercepted and the Seahawks lost. At the time, it was labelled, unequivocally, the worst play call in Super Bowl history. But objective analysis suggests that it was likely the correct decision. Passes are almost never intercepted that close to the end zone, a pass would have had the advantage of being unexpected and even an incomplete pass would have used little time (there were only 26 seconds remaining) and still left the opportunity for perhaps two more running plays. Carroll, to his credit, stuck by his decision and stated flatly that only the result was bad, not the decision.

Investors should apply Duke’s advice to their own portfolio decisions. For example, adding to a portfolio, particularly on market weakness, is a sound strategy. But it’s entirely possible that at the moment you invest the money the market will drop. This is a bad result, but the decision to add funds was correct. After all, markets eventually move higher. Look at the S&P 500 chart below. Overall, adding consistently to such a market is the right decision, but the immediate result of new contributions won’t be favourable in every instance.

S&P 500 – 30 years

Source: Bloomberg. Annualized total return (including dividends) = 9.96%

A process must also be applied to decision making. Investors should 1) analyze objectively; 2) though sometimes difficult, assign probabilities as to the likelihood of their decisions being correct (which brings awareness of the chances that they will be incorrect); and 3) forgive themselves if the decision doesn’t result in a positive outcome. This last point is particularly important because if investors can’t forgive themselves then they are much more likely to conclude that the outcome was purely reflective of the quality of their decision, which is not always the case.

Incidentally, I tend to conduct further research as I read, which is what I did with Thinking in Bets. It turns out that Duke is not well respected by the poker community and may have engaged in unethical behaviour in the past. A recent New Yorker article reveals some of the shadier details of her history. So, I had more decisions to make: 1) what was the likelihood that these allegations were true and 2) would the allegations change the quality of her arguments and hence the value of her advice? I decided: 1) likely they were true, but 2) the advice stood on its own merits.

Another useful recommendation from Duke’s book: avoid emotional, extreme conclusions. For example, Democrats are always right and Republicans always wrong. In the context of Duke, the extreme conclusion would have been to decide that, because she might have been unethical in the past, nothing in her book had value. If I’d drawn such a conclusion, I would have stopped reading, thrown the book in the garbage, and missed out on further great advice.

Similarly, avoid emotion-based, extreme decision-making with your investments as well. For instance, consider this conclusion: markets have corrected significantly—this virtually always leads to a full-fledged bear market. While it might feel this way in the moment, such a determination is simply availability bias at work: my present is painful, so my future is more likely to be painful as well. This is one reason why people who have recently witnessed a car accident are more likely to think that they will themselves be involved in one in the future. Of course, witnessing a car accident has zero bearing on future probabilities. And, the truth is, most market corrections don’t lead to bear markets. Here’s the proof:

Number of S&P 500 corrections and bear markets since 1945: corrections very seldom lead to bear markets

Source: RBC, Turner Investments

So, assess your decisions objectively and don’t let the results (good or bad) be the sole barometer of their correctness. Further, don’t ever draw conclusions assuming absolute accuracy. Every decision only has a probability of being right. And an emotion-driven, extreme position (corrections always result in bear markets) will simply lower probabilities.

Finally, it’s also permissible to occasionally bemoan our bad luck. We all need to vent. Even though I recognize that I made the correct decision with my Barzal rookie card purchase, it still hurts to think that the Tavares trade may turn my three-grand rookie card into a very expensive beer coaster.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Vice President, Private Client Group, Raymond James Ltd.