The potentially toxic consequences of a performance-driven culture on life and wellbeing has been thoroughly researched and widely publicised. We have responded to these warnings with medals for participation, employee wellness programmes and mental health days, to name but a few. Nevertheless, most of us continue to primarily judge our success and contentment based on achieving specific objectives. Possibly, this merely reflects that objectives are an inherent part of life. For evidence, look no further than the anxiety with which we watch and encourage our children to reach basic milestones such as walking and talking. Therefore, on the face of it, integral elements of life are also causing great harm for many of us.
Possibly, the key to unlocking this conundrum, is the manner in which we frame our objectives and judge our subsequent performance. It might be that a healthy assessment of performance focuses on how well you have used available opportunities, rather than focussing only on achieved outcomes. In this context, better performance might mean that you learn to make better use of the next opportunity to come your way. Oddly enough, while we often associate investing with being exclusively performance-driven, the investment world offers some useful lessons in this respect:
It can take hard work to find a worthwhile opportunity. We tend to associate the word “opportunity” with “luck”. While it is true that pure chance sometimes explains a period of exceptional investment performance, long-term and sustainable results requires more than luck. Active investors frequently consider and discard many different potential investments before finding an opportunity worth pursuing. By implication, when we feel that our performance in life is hampered by a lack of opportunity, we should consider if we searched hard enough to find it.
Using a variety of approaches increases your chances of making the most of an opportunity. Investments change hands because investors have different perceptions of the same set of facts and circumstances. As an investment is eagerly passed from one investor to another, the transaction often depends on an investor’s perceptions. Practically, it means that differences in investment style (e.g. value or growth) can impact on whether or not an investor identifies and exploits an opportunity. By utilising different investment styles at 36ONE (we are style agnostic), we increase our chances of spotting the investment opportunity within a particular situation. Differences in perception also explains why we fail to spot chances that others gladly seize in other areas of our lives. Changing a point of view can be a powerful factor in finding a new opportunity.
If you have missed an opportunity, it is best to move on and find a new one. All investors hate missing an investment opportunity. Not only do we regret the actions that we failed to take, we are also more than a little envious of those who gained from the investment. Nevertheless, the most successful investors move on quickly and recognise that current and future opportunities are worth more than those that have passed. Focusing on the past (or envying the success of others) frequently leads us to miss current opportunities in our lives, creating a fruitless cycle of regret and envy that is hard to break.
Rates of return are more important than absolute returns. This is an obvious principle for anyone who has ever compared returns between different investments or investment managers. One cannot meaningfully compare absolute returns achieved, as they depend on the amount of invested capital. Curiously, we tend to forget this principle when evaluating our performance in other contexts. In other words, we compare absolute measures of outcomes in our lives with that achieved by others, without considering the differences in our backgrounds and opportunity sets. This leads us to underestimate the rate of return that we achieved, stealing our motivation and contentment. Therefore, whenever we seek to compare the outcomes that we achieved with those of others, we should remind ourselves that comparisons of absolute performance are actually meaningless.
Evaluating an investment opportunity and subsequent performance requires context. The attractiveness of an investment opportunity depends on the investment objective. For example, so-called “life-stage” investment portfolios reflect that we all tend to recalibrate towards greater stability and higher income after retirement. Similarly, components of our investment portfolio might have different objectives resulting in different risk tolerances. In fact, the term “risk-adjusted returns” is an attempt to recognise that direct comparisons of rates of return are not necessarily meaningful due to that differing objectives and risk tolerances. However, in other aspects of our lives, we frequently envy the opportunities and achievements of others, without considering whether we would have been able to take on the risk budget required. In other words, we often blame a single factor for differences in outcome between people, when reality is far more complex. Recognising this complexity makes it easier for us to be content with outcomes that differ from those achieved by others.
Finally, having reflected on the lessons that investing can teach us, it is also important to realise that no investor applies these principles perfectly. We bemoan our lack of luck, get fixated on a specific investment style and commit a myriad of other errors that limit our investment outcomes. Nevertheless, when we realise that we have missed a few chances in investing or in life, it is always worthwhile to remember that:
“Opportunity may knock only once, but it passes by your door everyday.” — Frank K Sonnenberg