Investment philosophy, process and outcomes

In some regards investing is like dieting. It only works if you have a good philosophy, good plan, and you stick to it over the long term. So what is our investment philosophy at the Suburban Economic Investor?

Investment philosophy

We are strategic, top-down investors. This means we invest according to macro-economic trends. We select relatively few investment asset classes, we abore excessive diversification and the notion of buy and hold for the long term. We don't trade; our ideal is 1-2 major investment decisions per year if that. Our heroes' are sage investors like Jim Rogers and Marc Faber who correctly picked commodities and China as boom investments (and the US as a poor one), and we smart enough manage those investments to protect downside. Our economist heroes' include Nouriel Roubini (RGE) and Paul Kasriel (NTRS).

So how does it work. Four simple steps based on foundation knowledge of financial and economic concepts.

1. Monitor and understand the global economic situation
2. Select asset classes likely to benefit (high positive economic value) over the medium term
3. Select individual investments within these asset classes
4. Manage entry, risk and exit to investments

For example. In 1999 our sage heroes' Rogers and Faber identified commodities as a group where at two decade generation lows. They also understood the central banks were printing excess money and that real rates would become negative which was bullish for commodities, and bearish for the USD. In 2003 they recognised China's entry to the WTO would spark a huge boom in that country. In 2006 these sage's went short financials recognising the imminent US housing bust. In 2007 they went long agriculture stocks. We don't pretend to be able to match this performance, but we do intend to 1) understand the fundamentals, 2) follow the global economy, 3) follow the sages by selecting good asset classes, 4) manage risk in our investments carefully.

Investment process versus outcomes

Investing is a probabilistic field in which both the likelihood and payoff for a decision in important (more on this later). In these fields the long-term investment philosophy and process are more important than short-term outcomes. We can control our investment philosophy, but we can't control short-term outcomes. Consider that in the following matrix:

We can't control the market, but we are aiming for an investment process which will deliver either deserved success or unlucky outcomes. We don't want to confuse blind luck with investing genius on our behalf. This 2 dimension by 2 dimension (2 x 2) matrix introduces both game theory and expected value concepts which are highly important to financial and life decision making. At its simplest we consider the performance what we can control (our investment process), with that which we can't control (market outcome). A useful concept for making all sorts of decisions with imperfect information.