Wednesday, September 21, 2011

Making the Hard Decisions

One of my favorite movie scenes is played by Al Pacino (playing a character named Frank Slade) in a movie called Scent of a Woman.

Pacino won an Academy Award in1992 for his portrayal of a blind irascible Army veteran who befriends a prep school student named Charlie Simms (played by Chris O'Donnell).

Here's the scene - please be aware there is some rough language in the clip:

The part that really strikes home with me is when Slade says something to the effect:

"Now, I have come to a crossroads in my life. In my life I have known the right path to take but I never took it. You know why? It was too damn hard."

Making difficult decisions is easy to discuss but hard to implement. In the investment world, most investors realize that asset allocation is one of the most important decisions an investor can make - and yet, in my experience, it is largely ignored.

James Montier has a good column in this morning's Financial Times discussing this phenomena. Mr. Montier notes that most investment committees focus on benchmarks such as the S&P 500 rather than discussing whether it makes sense for a particular investment strategy to be followed.

To paraphase Mr. Pacino's character: most investment committees avoid asset allocation discussions because they're too damn hard.

Here's what Mr. Montier writes:

Perhaps this neglect of the importance of asset class decisions stems from the fact that such discussions are inevitably harder than discussing the relative merits of a beauty parade of managers. Discussions on asset classes often degenerate into debates over the economic outlook.

Sadly this is largely an investment dead end. There is no evidence that anyone can read the economic tea leaves consistently well. As if that weren't difficult enough, even if you got the economics right, you still have to work out how the markets will react, and which assets will benefit.