As seen in The Globe and Mail, July 19, 2023 (for subscribers only)
A company’s balance sheet tells investors if the firm could be vulnerable to a change in business conditions or be able to survive a period of bad luck.
As investors, our attention is finite, and time is a limited resource. With this constraint in mind, it’s wiser to focus more on the elements within our control and less on those beyond it.
There are countless things we cannot control. For instance, we don’t know where interest rates will be in a year, and neither does anyone else. While they’re important, they remain unknowable. So, why spend valuable time and effort on such an exercise?
Instead, a bottom-up investor pays attention to what lies within their control – researching and understanding the knowable and significant elements that can improve the odds of success.
That includes activities such as studying a company’s financials. After all, a quarterly or annual report is simply a collection of little things that can add up to a big story.
A company’s balance sheet tells investors if the firm could be vulnerable to a change in business conditions or be able to survive a period of bad luck. Studying management and its track record can provide clues about future behaviours, which could impact a company’s value. If a company is established, we can learn how it has navigated good and bad economic times and if it has become more valuable over time.
These are small things investors have complete control over where they can spend their time, and it can make the difference between an average or excellent investment return.
What we can and can’t control.
William Irvine, author of A Guide to the Good Life: The Ancient Art of Stoic Joy, is an academic and self-described adherent of the ancient philosophy of Stoicism. The Stoics believed the key to happiness is to focus on the things within our control and let go of those beyond it. The initial step involves identifying what lies within our control. According to the Stoics, we have control over little other than our thoughts and actions.
In addition to the dichotomy of control (what we can and cannot control), there’s the trichotomy of control, which expands the original concept to include things that are partially within our control. Health is a good example because by taking certain actions and refraining from others, we can modify our well-being – up to a point. Investing is another domain that falls under this trichotomy.
As investors, we can research a potential investment by reading analyst reports, attending conferences, and so forth. These actions fall within our control. However, despite these best efforts, sometimes things will go awry. The company may be the subject of litigation or side-swiped by a new technological innovation. External factors such as a rapid increase in interest rates can overshadow almost everything else.If there’s a secret to being a successful and happy investor, it has more to do with temperament. Allowing oneself to be emotionally whipsawed by short-term events is a recipe for burnout.
The most resilient and, therefore, successful investors are those who focus their time and energy on the things they can control. That’s a recipe for generating sustainable investment returns and, possibly, for happiness too.
Felix Narhi is chief investment officer and portfolio manager at PenderFund Capital Management Ltd. Inc. in Vancouver.