The Essence Of Strategy Is Choosing What Not To Do

The essence of strategy is choosing what not to do. Think of the usual strategic choices you make when making any investment or strategy; such as, holding shares for three years, trading for three months, short-selling, dividend and buyback, holding a government bond, investing in a company, so on and so forth.

You would think the underlying skills are far more important than the knowledge of the subject. It would seem to make sense; if a few lines on a piece of paper make the difference between success and failure, the more knowledge you have, the better.

But the evidence tells us otherwise. For over the past 50 years a study by a professor at MIT, Daniel Kahneman, has shown that what makes for good strategy is surprisingly simple:

Pick something you can do well

You do not need to know anything about the subjects you are about to choose or the principles you are trying to abide by.

The more knowledge you know, the less you will be able to accomplish with it. You will know that knowing the right answer will improve your chances, but the wrong answer will not – just like it will not help you to correctly assess risk and/or capital in relation to a possible reward.

It is very simple to predict the value of stocks (stock markets) in the short and long run – the relevant basic knowledge is most of our knowledge, but far from all.

The more you know about a subject, the more you can draw on it in order to rationalize a potentially foolhardy decision. If you don’t have any knowledge on what to do, you have to construct a decision procedure that will lead to a good result.

The difference between this procedure and a simple step-by-step explanation is not the length of time or money spent on it; it is knowledge and intellectual skills.

If a decade ago, an investment portfolio manager told you that he would cover your expenses, provide you with an income and do all you had to do was to pick an index fund and let it do the work for you.

The index fund and sit back, for the rest would take care of itself.

How many of us would have taken this position and sold everything on offer? How many people would have agreed to buy a similar position that was covered by an insurance company?

You see the problem.

The underlying concepts are easy to understand. You don’t need to be the smartest guy on the planet to use them. The problem is that this is far easier said than done.

The difficulty is that most of us do not have the intellectual skills to do it.

Most people do not understand why markets are “price-determined” in the first place. It is not the absence of traders that is at the root of their existence, but the existence of those who are able to separate the subject of an investment from its object (price of an asset), and from the prices of the transactions which drive the prices of those assets.

Furthermore, people often do not understand that the “object of an investment” might be the exercise of some skill (dealing in a particular market, or being a good investor, or trading

The difference between intelligence and strategy is in doing nothing.

– Michael Mauboussin

In my opinion, the hardest part of any human endeavour is having to sit and think. It is the kind of exercise that makes you wonder whether you were born a “brute” or “intelligent”. When, from early childhood, we all had to concentrate on tasks that were not particularly complicated, it only took us a few minutes to complete.

In the modern world, it takes time and thought to focus on a task that is logically the same. The number of hours spent to make ourselves an accomplished crossword constructor, carpenter, or footballer is no more than the time it would take to do the same on an average day. If that task does not interest us (or we are not good at it), we might not do it for years, until the feeling to “get back into the groove” gets stronger than our dislike for the activity itself.

We do not often realize that the main reason why we give up “on things” is simply because we do not want to do them. It is not that we cannot do them, it is that we do not want to. Or we do not