James Montier delivered the keynote speech at this year’s annual conference of the CFA Institute.  It was titled simply, “The Flaws of Finance.”  Just as simply, Montier’s job title was given as “investment professional.”  His informative and entertaining talk (which is available onlineCFA Institute | Montier’s remarks appear about eighteen minutes in.) was a perfect prelude to presentations about the topics of the day, many of which reflected three colliding elements — the investment profession, the business, and theories of finance.

To summarize my impressions of the conference I will be doing a series of postings, on this site and on research puzzle pix, where the first dispatch appeared.the research puzzle | This link will provide an updated list of the entire series as it proceeds.

Montier’s talk was structured around four flaws:  Bad models, bad policies, bad incentives, and bad behavior.  Taken together, they have ... continues

Last Saturday, there was an article in the Wall Street Journal entitled, “Time to Cut Back on Apple?”Wall Street Journal | This is the article, which as of the time of my writing was not behind the Journal’s paywall.  Given the explosive rebound in Apple’s share price in response to its earnings release, a commenter after the fact responded simply, “Answer:  NO.”

Apple has become the largest stock in the S&P 500 due to its sharp move higher (it’s up more than 50% so far this year alone).  The normal decision making process can become distorted when that occurs; I was quoted in the article to that effect.

Jeremy Grantham has written persuasively that institutional “investment behavior is driven by career risk.”GMO | That quote is from the first sentence of his April 2012 quarterly letter.  Investments are made not just on their merits, but in comparison to the crowd of investors against which you compete and the benchmark ... continues

It is not easy figuring out how much structure to put into an investment process and exactly how to make that happen.  Every organization is different and the culture of one might tolerate quite a bit of process and even thrive as a result of it, while a kind of “process lite” might fit better at another.

As always, what you do and what you say you do ought to be in sync.  While that sounds obvious, if you say, “We’re top-down sector rotators,” what does that really mean?  How does it work?  What structural elements have you put in place to deal with the most common errors that can occur?

Whatever your investment approach, there is a body of knowledge available to you about it.  From the industry performance data on that strategy, to academic research on the market drivers of it, to the trail of decisions at your own organization, there is plenty of evidence available to you on the patterns of errors you are likely to make.  What are you willing to ... continues

In The Checklist Manifesto, Atul Gawande extols the virtues of checklists and says, “They provide a kind of cognitive net.”

As I examined in the previous posting in this series,the research puzzle | This PDF is an index of the postings. that net can catch errors in simple processes and it can prevent failure in more complex ones.  How might checklists be applied in the investment world?

Gawande has a section in the book about investors, including Guy Spier, Mohnish Pabrai, and a third that wished to remain anonymous.  (The author dubbed him “Cook.”)  Pabrai described a process in which he searches widely for ideas to consider, a mode from which he shifts when he finds one that seems worthy of consideration.  Then he starts to dig very deeply and if it seems promising, his excitement builds and he goes into “greed mode.”  Spier calls it “cocaine brain.”  The behavioral instincts kick in and start working against you.  That’s ... continues

In The Checklist Manifesto, Atul Gawande wrote, “We are besieged by simple problems.”  And “simple” does not mean unimportant, just relatively easy to deal with when a little rigor is applied.  Checklists fit the bill and can be remarkably effective at minimizing those problems.the research puzzle | This is the third posting in a series on checklists, which are indexed in this PDF.

But what about complex problems “where outcomes remain highly uncertain”?  After all, that’s what characterizes much of the business of investment organizations.

Gawande offers some examples of complexity for consideration.  The first is the construction of a skyscraper.  It’s not like the old days, when a “Master Builder” supervised everything from start to finish.  Now projects can involve sixteen different trades that have to be coordinated, and elaborate interconnecting checklists guide each set of experts along a carefully planned ... continues