The limitations of mainstream financial media
The mass media surrounds us all, from the news on the radio, to websites selling clicks. It is designed for the consumer, for those who don't want to think or research the heart of the issue but want to feel included in the world and appreciate global affairs. It is for this reason, that I personally choose not to consume mass media. I view mass media to be a way for larger institutions to promote a common narrative, which disadvantages the individual and removes critical thinking from the troubles of global affairs. I instead choose to follow closely a handful of media which align to my broader goals, and feel passionate about, or personally impact me. This could be in the form of certain video, written or audio formats through podcasts, YouTube or books.
Why financial media does not aid the investor
It is obvious that much of the financial media, from traditional newspapers, to financial journalism is a contributor to the greater 'noise' found within markets. To the individual investor, they offer little benefit in terms of research or understanding. They serve as a distraction, presenting a biased overview of broad market activity, while removing the role of critical thinking.
The fundamental role of the investor is to make strategic decisions regarding capital allocation into securities offering risk adjusted excess returns relative to their benchmarks. The capital allocation should align to the goals and objectives of the investor. In order to do this, capital must be allocated to ideas which offer the most upside potential with the least downside and develop ideas of sufficient quality to allow the aforementioned. Ideas need to be evaluated and a thesis argued to ensure the idea has validity. The role of mainstream financial media in describing the investor landscape to the layman oversimplifies the problem and removes the element of critical thinking which is needed to evaluate ideas. The need for critical thinking is paramount in investing which is often described as 90% thinking and 10% doing.
The need for a systems based approach
Having spent time during the last week closely following the major market indices, it soon became evident that there was room for improvement in the selection and evaluation of ideas. This can be achieved through a research process and executing good judgement. One such method is the use of a mental model, an example of which is used by Charlie Munger – the circle of competence. This defines a small niche in one area of interest in which you personally feel knowledgeable of and are interested in. This will form a key part of my investing framework from this point forward.
As an undergraduate engineer, much of my experience and thinking relates to process and systems based thinking, which is another form of mental model. The use of systems allow individual themes to be grouped and examined, individually. Once each theme or system is understood, they can be overlapped and combined to take the strongest attributes of each. An example of this is the idea of taking a top down market view such as Global Macro Investing and combining this with bottom up Value investing. Both of these styles or themes are unique in their own right, however, represent a combination of ideas where one compliments the other.
Another way of considering a system is a series of interlinked processes. These processes may not be linearly interlinked, but rather complimentary and concurrent to each other. In order to maximise time, and achieve superior results from the market, I am implementing and continually developing a series of processes which make up my investing system. These processes scale from the molecular day to day habits which then influence and inform the investing framework.
Common investing systems and processes
On a day to day basis, there are a variety of processes which I undertake. Firstly, prior to the market opening, I undertake a review of major indices, commodities, and currencies to monitor developments across the globe. This starts with a check of major indices in Asia and Europe, any large news developments, major currencies including movement in the Euro, Yen, Pound and Dollar. As part of this process, I may check a financial media outlet to check for any breaking news which may impact market activity. Next I check Gold and oil, before moving to review US bond yields across the curve, the VIX and the previous day's US indices close. After completing this process, the results are summarised in a spreadsheet to give a broad overview and affirmation of the market in my mind.
Another common and effective process is the use of journaling which aligns my goals to the systems I have in place and outlines a route for how to achieve them. Journaling allows for the visualisation and clarity of ideas, as well as a review for trades taken with their outcome. This process allows us to learn from our mistakes and keeping of strong records. This is part of a broader system for review and continuous improvement as an investor.
The summary
The purpose of this article is to outline the importance of a research based approach to investing by avoiding mainstream media which limits our ability for critical thinking and idea generation. It aims to provide some examples and applications of processes and systems to be implemented by the individual investor to improve their decision making and judgement when making capital allocation decisions, as well as improving the mental state.