CINCINNATI BUSINESS COURIER
January 27-February 2, 1986
INVESTMENTS
Charles Vaughan
BEN FRANKLIN DECISIONS
AHA! Probably the greatest feeling known to man is that little utterance. It is reserved for that wonderful time when we recognize a special insight that resolves a thorny problem. Unfortunately, most of us get to use it too seldom. There are, of course, certain problems that can only be dealt with by some especially creative insight. Most solutions require a much less demanding approach.
Indecision may well be the investor’s worst enemy. Opportunities are lost, bad investments tolerated and inept management condoned, due to the inability to make a decision. A part of this problem is the inherent circular nature of the decision making process itself.
The standard method applied to financial planning, for example, is to ask the investor to define his goals. That in itself requires an extremely complex decision given the nearly infinite range of possible financial goals. If a person cannot state what he wants, the process remains at a standstill. My personal experience leads me to conclude that a large percentage is stuck in this trap.
It would be useful for such people to find a method to move beyond this stage and I would like to propose such a method. But first, we need to look at the reasons behind this lack of ability to decide (also known as procrastination). For most people, it is not lack of knowledge that causes hesitation; it is a habit most of us have been taught that we should riot make mistakes, in essence, to be perfect.
“Anything worth doing is worth doing well.” Such messages from the past tend to create in us a fear of failure. Rather than fail, we choose not to make a commitment. This often takes the form of over studying a problem or drawing and redrawing plans.
We tend to overlook the fact that corporate chief executive officers get paid huge incomes to make decisions. They are not expected to make all “right decisions.” In fact, the consequences of many decisions are not known for several years. So, what I am advocating is that you become chief executive officer of your own investment portfolio, whether it is a $2,000 IRA or a million dollar fund.
One of the most creative and successful men of all time, Ben Franklin, used a very simple approach to making decisions. It consisted of drawing a line down the center of a sheet of blank paper. On one side he would list all the advantages of a particular strategy; on the other side he would list the disadvantages. When finished, he would have a balance scale with which to make a judgment. The same technique can be applied to alternative investment strategies by making a sheet for each approach, then comparing the sheets side by side in the same manner.
The second principle that should be applied is that of avoiding all-or-nothing commitments. These I call “one-way streets.” It is far easier to make a decision now if we know that we can change it at little cost later.
A third principle that helps in decision making is the concept of 80/20. That is the notion that in many situations, 80 percent of the results come from 20 percent of the attempts. In sales, 80 percent of the business comes from 20 percent of the customers. In investing, 80 percent of the profitability comes from the top 20 percent performing investments. While this is inexact, it works more often than not. The importance in decision making is that it helps us to recognize that our best results will come from a few of our decisions and the others will have little impact. More attempts equal more chances of success.