Iron Capital Insights

  • Iron Capital Insights
  • July 10, 2015
  • Chuck Osborne

Control

There is nothing more frustrating in our automated world than dealing with a computer system issue. You are working away then all of a sudden, nothing. You reboot because you know that is what the IT people will tell you. Then you get the blue screen of death and call IT. “Have you tried rebooting?” Yes. “Are you sure it is plugged in?” Yes. “Okay I’ll be right there.” He comes, he reboots and it works again. “I swear I did that,” you say. “Sure you did,” he says as he walks away.

It is so frustrating, but it is part of our lives today. At some point we just have to understand that it is largely out of our control. In his book “The 7 Habits of Highly Successful People,” Stephen Covey states habit one as being proactive. Part of living a proactive life is understanding what is in your control and what is not. He referred to items that one can control as one’s circle of influence.

Covey is not alone. In “Golf is not a Game of Perfect,” sports psychologist Bob Rotella implores golfers to focus on process, because once the ball leaves the club face, everything that happens is out of their control. John Wooden, the legendary basketball coach, spoke about this in his books, too. Wooden focused on teaching and on his players’ execution of what they were taught, not on winning and losing, because he understood that the outcome is often impacted by luck, good or bad, and is therefore out of his control. The interesting thing is that Bob Rotella’s clients have won a lot of golf tournaments, and John Wooden’s teams won a lot of championships. That is what happens when one focuses on the things that are within his control.

In the investment world we often refer to the rate of return on an investment as performance. I once had a senior portfolio manager tell me that we should ban such talk. Performance is something that happens on a stage, he would say. We deliver investment results. When I first heard this I didn’t think much about it; I thought it was just an old man splitting hairs. Now, I’m a lot older and have begun to understand what a difference hair splitting can make.

First, it puts one in the correct mindset for making investment decisions. We can discuss yesterday’s performance, but it seems silly to discuss yesterday’s investment results. The word investment itself connotes a longer, more meaningful time period, while the word results connotes some sense of finality. The investment result cannot truly be known until it has fully run its course. The day we sell a stock is the first day that we truly know the end result. This puts us in a much better mindset for making prudent decisions.

Secondly, day-to-day performance of an investment is not something one can control. We cannot control, or even know in advance, that the New York Stock Exchange (NYSE) will suffer a technical glitch that will halt trading. We cannot control what happens in Greece. We cannot control the short-term volatility of China’s equity markets. The list of things that have short-term influence on performance which we cannot control could go on forever.

So let’s focus on what we can control. We can control what custodians we recommend for use to our clients. We are not short-term traders, so rare temporary technical issues that halt trading are not really of concern. What is of concern is making sure that good records are kept of what our clients’ actually own. We also keep our own redundant system. Prices change, and pricing errors can be fixed – this is the NYSE’s role. Having proper documentation of what one owns is of most importance, and that is the role of the custodian.

We can control what we own. We can know the balance sheet, the income statement. We can have an understanding of the products they make. We can judge the quality of their management. We can have reasonable certainty that cash will be there for dividend payments, and that the company has intrinsic value. We can diversify knowing that we won’t always be right. In other words, we can do the fundamental things that prudent investors do, which we know bring long-term success. That is what we can do, and what we will continue to do every day for our clients.

Warm Regards,
Chuck Osborne, CFA
Managing Director