The Selection Paradox

The Selection Paradox

By Brad Thomason, CPA

 

What you invest in matters.  What you invest in doesn’t matter.  Let’s discuss.

What you invest in matters because if you are putting your capital into things which don’t contribute to your overall goals, you are wasting time and opportunity, and are likely to fail.

The specific investment you pick is irrelevant as long as it delivers on the broader portfolio goal.  The investments aren’t the end themselves, just the means to the end.  The goal of the exercise is not to be a successful investor, per se, but to grow capital in such a way that it can be used by you and your family in the manner it’s needed, when the time comes.  The focus should be more on the what than the how; and specific investments are just a part of the how.

See the difference?  It’s admittedly paradoxical.  But it is important to appreciate each perspective, because without understanding both of them your odds of succeeding go down.  Think of it as two sides of the same coin.

When you are contemplating different alternatives for an allocation of capital, it is critical to get a sense of which ones are most contributory to your goals (assuming everything works the way you hope it will), and which ones don’t stand a chance to begin with.  If you need 7%, buy a 1% CD and actually get 1%, that isn’t a win even though the investment did exactly what it was supposed to.  Because you needed 7% and didn’t get it.  In this sense, what you invest in matters very much.

However, once you’ve finished this stage of the analysis, the situation changes.  If you need 7% and the four options left on the table have reasonable prospects for earning 7% or more, the actual one you chose becomes less important.  Now, on some future Monday morning once you know how all four played out, you can make the arm-chair assessment that it would have mattered if you’d gone with x versus y.  But at the moment of decision?  There’s really no way to know, and further analysis isn’t going to get you much.  Waiting, on the other hand, can delay the start of your investment returns; and may cause you to miss the whole thing entirely.

I mention this because I see so much discussion about investments that people love or hate.  I don’t think I’ve ever felt that strongly, one way or the other, about a potential investment.  I don’t have those kinds of feelings for my screwdrivers or hammers.  Really, not even my fishing rods.  Those things, like particular investments, are in the end, just tools.  They fit the situation or they don’t.  If they do, use them.  If they don’t, take a pass.

Ever seen a thirty page report on why a particular stock is so great?  Ever read a thirty page report touting the virtues of this crescent wrench versus that crescent wrench?  Lots of examples of that first one floating around.  Never seen the second.

What you invest in matters, from the standpoint that you need to put your capital into things which can meaningfully contribute to what you are trying to accomplish.  But if you lose sight of the fact that the real goal is the overall, long-term results, you risk getting caught up in the details of the tools themselves.  The tools are critical to doing the work.  But they are just the means, not the end.  As long as you are picking tools which can work, which particular tool gets the call – the red handle or the green one – is less important.  Once you’ve found something that will work, it’s usually better to get to it than to sit around being all dreamy about how great a tool you’ve found; or spend countless hours trying to determine if one is .0001% more effective than the other.

After all, you aren’t an investor until you actually deploy the capital.  Up to that point you’re just an enthusiastic spectator.  Enthusiastic spectators often get a lot of enjoyment out of watching the game.  But they don’t get the direct benefits of playing and winning it.