New Era – Revisiting “Investment Decisions Framework”

In 2016, I wrote an article about why to invest in bitcoin. I explained why that would be the best alternative compared to other asset classes. Keep in mind that at the time bitcoin was not even thought to be an asset, let alone something that most of the investing world or investment gurus would invest in. In fact, I also wrote that it was the least risky of all (inspired by the new kid in the block)! Looking back it has produced returns of more than 2000% in this period.

Now it is spring 2018, probably the last snowing day, and I am inspired to share my thoughts on decisioning and my investment decisions framework for the new era we live in.

Your investment decision should strengthen your portfolio in at least three ways:

  • Layer 1 – Expanded Selection of Assets
  • Layer 2 – Decision Analysis to Build Conviction
  • Layer 3 – Allocation Decisions Driven by Logic

Layer 1 – Expanded Selection of Assets: Today swathes of money are blindly chasing ETFs and passive allocations – the money is moving dangerously in one direction, and volatility in the market has become alarmingly low. So it is pretty nasty out there right now as investment has become very very unidirectional and can’t be sustained. Please become multi-dimensional. There are multiple assets and n number of options in each of those asset classes. Many new asset classes are emerging, and many old ones are moving off the radar. So we can’t keep checking the same periscope. I am not saying let’s move as the world is moving. No, not at all. In fact, I am a big fan of old asset classes, as they will soon become very very important. What I mean is, we should not think about selecting assets in the old-fashioned way. We need to expand our horizon and constantly seek new assets – things are changing rapidly with technology, and technology itself is the biggest investment you can make.  So don’t get stuck (in management, we would say don’t get into an anchoring problem) with existing assets that you hold. Seek new ones, learn, experiment and add to your arsenal. Don’t throw away old asset classes as they become unfashionable, either. Be very critical in your decisioning. If you are an investment house, have people, partners, tools and processes that help you grow your assets, in both number and quality. Don’t miss out on great investments!

Layer 2 – Decision Analysis to Build Conviction: Every asset has its own value drivers, things that make that particular asset grow or shrink. They can be radically different from one another even in the same asset class. For example, the pre-dominant (but by no means the sole) value driver for Ethereum is the developer community, whereas for Bitcoin it is the network transactions and wallet counts. For Apple, it is product & service purchases. You need to look at assets together with their value drivers. Industry people will know the value drivers, so you need to learn something about them. Focus on understanding the predominant value driver and base the asset’s growth on that – irrespective of the price movements. It’s best to collaborate with experts who can do that for you.

Layer 3 – Allocation Decisions Driven by Logic: Even once you have selected multiple assets and analyzed which ones are good investments, never jump to investing immediately. Never have FOMO – fear of missing out. You need to look at how the decision to include the new asset changes the total risk of existing portfolio. Is it rightly correlated and does it reduce the overall risk? What % you should allocate? Is it a good time to invest in this asset class? If not, wait for the right time. One of the best ways to invest in any asset class is with dollar-cost-averaging – in layman’s terms, if you plan to invest x$, start by investing a small proportion of that x$ and keep adding to your initial investment as your conviction grows. Another most important criterion is liquidity.  Never ever put all your allocation into illiquid assets. For example, many families ruin their entire productive life by buying a house (an illiquid asset) and then working just to pay the loan for that house. Keep your emotions out of your allocations: have a proper model and system for that, too. If you are an investment house, definitely have proper tools for allocation methods, maintain a healthy watchlist and have governance implemented on top of all your investments.

Above all investment decisions, the best investment is always investing in yourself and the people around you. Over time, there is nothing that beats that. If you ever have a choice between asset classes and people, go for people without a question. If after that you have another important decision to make – then it is to invest in technology.

Have a great day!

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