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Visualizing Investment Principles

MJG
edited November 2013 in Fund Discussions
Hi Guys,

You’ve frequently heard that a picture is worth 10,000 words. That is often true, especially when making investment choices. Pictures, more likely diagrams and charts, shorten, organize, and crystallize the sometimes scores of inputs that are assembled and assessed when formulating an investment decision.

Scores of statistical inputs tend to overwhelm our restricted cognitive powers. Visualization lessens the load. In the 1950s, researcher George Miller proclaimed “The Magical Number Seven, Plus or Minus Two”. He was defining the limitations of our cognitive capacity. That’s the primary reason why our telephone numbers contain 7 basic digits.

In complex circumstances, visualization offers great power directed at simplification. In his informative book " The Behavioral Gap”, author Carl Richards uses an extensive array of napkin sketches to illustrate investment principles and decision making wisdom. In 2012, the Advisor Perspectives published an article by Richards that presented some of his favorite investment guideline drawings. Here is a Link to that summary article:

http://www.advisorperspectives.com/newsletters12/The_Best_of_Carl_Richards.php

I totally enjoyed and learned from it. Please visit the reference. If you liked that sampler, you might want to access Richards website which offers a more complete catalogue of his sketches. Here is the Link to those diagrams:

http://www.behaviorgap.com/sketches/

The genesis for the Behavioral Gap concept and text is illustrated in the following drawing from Richards’ website:

http://www.behaviorgap.com/sketch/behavior-gap-original/

In the tradition of Daniel Kahneman, Richards’ strongly believes that we fall victim to our own behavioral biases. These shortcomings operate to truncate our portfolio returns; recognizing them proffers the potential for improved portfolio performance.

Richards says: "...decisions should be made on principles not on our feelings about what's going to happen...". Yet we allow our emotions to compromise time-tested investment principles. Some folks believe that it’s not what you know that matters, it is more governed by how well you know yourself.

The Richards diagrams that I referenced might just help in your investment decision making. I hope they do.

The drawings are fun stuff, and are simultaneously an investment teaching tool. There’s a lot of financial wisdom rooted in these child-like simplistic drawings. It doesn’t get much better than that, especially if you deploy some of their lessons in your investment program.

Best Regards.

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