Im comfortable with this.
Very often Ive heard such a rationale used to signify
a final investment decision, ostensibly after a careful and
dispassionate consideration of the potential risks and return.
Unfortunately, more often than not, this comment simply
signifies a lack of the conflicting thoughts that should
accompany a difficult decision, and if anything, is evidence of
the predominance of emotion in the decision makers
process, as opposed to rational analysis.
Why should we expect to be comfortable with a tough
Well, from an evolutionary perspective, there is some basis
and value in such comfort as a decision-making
criterion. Take the animal world: As any group forages, it
benefits from the shared watchfulness of all of its members.
Each member can eat comfortably, content in the knowledge that
should a predator appear, many other individuals will alert the
group to the predators presence and likely provide ample
time to escape, be that a sprint across the field or a scamper
up a tree. Each individuals risk is mitigated by shared
On the other hand, the benefit to straying outside of the
group to find a modestly better grazing ground is extremely
limited. And more importantly, it comes with a much higher risk
of being the one animal to get caught. In this situation,
discomfort is highly adaptive; its
self-preservations way of telling you that something is
The best interest of the hunted herd is usually aligned with
the individual best interest of each of its members. And
its important to realize that it is only in the last few
dozen millennia a blink of the eye relative to the
millions of years of our species evolution that
humans have been more hunter than hunted.
Survival in financial markets, however, is a decidedly
I have a good friend in Chicago that at one time made a
living day (or more accurately, night) trading European equity
futures and derivatives. At one of the prop shops where he
worked, his trading desk manager, a burly Irishman from
Chicagos south side, once asked how much risk he had
My friends response was Im comfortable
with the level of risk I have on.
The highly caffeinated desk managers reaction was
immediate and explosive.
Then you dont have enough risk on! the
former floor trader bellowed, balling up his substantial fists
and slamming them down on the table. The market
doesnt pay you to be comfortable!
Needless to say, my friend never used his comfort level in
describing an investment ever again.
After hearing this story and laughing hysterically,
knowing well both parties to the exchange I gradually
came to reflect upon the wisdom of the grizzled traders
Unlike the foraging creatures in our anecdote above, it
actually does pay handsomely to step out of your comfort zone
in investing. And conversely, our comfort often blinds us to
the considerable risks of conformity. Too many investors are
more willing to fail conventionally than succeed
Warren Buffett has famously said be fearful when
others are greedy and greedy when others are fearful.
This sage advice from no less than perhaps the greatest
investor of all time speaks directly to this issue of comfort
When animal spirits are strong, and the equity market has
had a sustained rally, investing in equities is quite easy,
despite the reality that risks are likely higher and
forward-looking returns lower. On the other hand, after a steep
selloff, when many investors are panicking and selling
non-economically, stocks are generally offered at their biggest
discounts. Subsequent returns after such bargain-basement
buying opportunities are much higher than long-run
For example, it was a very easy decision to buy stocks in
the late nineties, during the peak of the tech boom. As of
December 1998, U.S. stocks had averaged total returns of
roughly 20 percent per year since the beginning of that decade.
To someone excitedly buying at that time, the annualized return
of -1.8 percent over the next ten years would have been
Sadly, most research that shows that this is exactly the
behavior most investors retail and institutional alike
display: buying stocks or hiring managers after strong
recent performance, only to have them underperform
Conversely, investing in equities in December of 2008 would
have been enormously contrarian and extremely uncomfortable,
but an investor courageous enough to do just that would have
earned 14.5 percent annually over the following eight
Going against the crowd is always uncomfortable, but often
One could argue that the simplest definition of a fiduciary
is someone whose job it is to make the uncomfortable decisions
without getting the benefit of it. It is our duty to own that
discomfort on behalf of our beneficiaries, who are often
incapable of or unwilling to do so.
The market doesnt pay us to be comfortable. However,
if we can muster the courage to make rational investment
decisions without concern for the opinions of convention, it
will pay our beneficiaries handsomely for our discomfort.
Christopher M. Schelling is the director of private
equity investments for the Texas Municipal Retirement