Investing well requires consistency and precision.
Every so often, you might make a big investment decision. But to invest well in general, small actions have to be executed — and executed well — over and over again. There are numerous little things that you have to get right.
When an investor gets negative results, or a cumulative outcome they aren’t happy with, it isn’t always a big thing that went wrong. Sometimes it’s a little thing, a problem the investor doesn’t notice or can’t even see, that is the problem source.
A wonderful example of this comes from “The Perfectionists,” a book by Simon Winchester.
In the early 1940s, in the middle of World War II, the British military had a problem. American-made antitank ammunition designed to stop German tanks was jamming when fired from British guns.
The problem was vexing, because the jamming happened at random with no explanation as to why. And the problem was serious, because jammed weaponry in the heat of battle is a matter of life and death.
A British soldier named Povey was sent to America to investigate the problem. His first stop was the manufacturing plants in Detroit.
Povey used precise measuring instruments, applied to batches of ammunition over the course of weeks, to determine all the specifications were being met by the Detroit plant. He found no problems; in theory, the shells should be firing perfectly.
The plant was ruled out as a problem source. So Povey traveled with the ammunition on its trip back to Europe.
First, he rode on the ammunition trains that transported the shells from Detroit to the East Coast. With his leather case of measuring equipment, he tested the shell batches at various points on the train trip.
There was no problem there either, and still no explanation as to why some of the shells would jam. They should still, at least in theory, fit the British gun barrels perfectly.
Then, Povey boarded the cargo ship that took the shells across the Atlantic. It was an awful trip. The ship broke down at one point, lost its convoy at another point — leaving them vulnerable to attack by German U-boats — and went through a hellish ocean storm that made the entire crew violently seasick.
But this is where Povey discovered the problem. The rocking of the cargo ship, as it navigated intense storms at sea, was a source of damage for some of the shells.
Some of the crates in the ship’s hold — not all, but those closest to the outer edge of the stacks — would crash into the walls of the hold as the ship rocked back and forth.
This repeated bashing was causing damage to the shells, distorting the lip of the brass cartridge casing. But the level of distortion was only a fraction of an inch or so — too small to be detected by the human eye.
This explained why only some of the shells were jamming; only the crates on the outer edges of the stacks were problematic. And it explained why the jams seemed to happen at random. To the human eye, the warped shells looked like good ones.
The solution was simple: The manufacturing plant in Detroit was instructed to reinforce the cardboard and wood in the ammunition crates to better protect the shells from bruising in the ship’s cargo hold. Once that was done, the random jamming problem was solved.
When it came to the mystery of the misfiring antitank shells, implementing a solution was easy.
It was identifying the problem — figuring out what the issue was in the first place — that was the hard part.
What does this have to do with investing? For one thing, ponder the idea of “misfires” in an investment portfolio.
How many investors really think about position size? How many investors consider whether a position size is at risk of being too large, or conversely too small, to serve the portfolio correctly?
A portfolio full of haphazardly sized positions is, in some ways, like an antitank gun supplied with random-sized shells.
Some of the investments — shells in this metaphor — will execute properly by luck or good fortune, while others will jam or misfire. The odds of achieving a desirable outcome are greatly reduced by this lack of consistency.
And yet, for investors, it is possible (and in fact common) to not recognize the nature of the improperly sized position problem, or to even be aware the problem exists at all.
A long journey, with a toolkit full of precise measuring tools, might be required to identify the issue.
And yet, for investors who have become part of the TradeSmith family, the solution to this problem — as it relates to position size — is as simple as the reinforced packing crates coming out of Detroit.
Our investment software makes it easy to size positions properly with a precise and consistent methodology based on measures of volatility, so that — more or less — risky investment positions aren’t too big and conservative investment positions aren’t too small.
In TradeStops, you can use the Position Size Calculator to measure and account for risk with individual investments. And we have the Risk Rebalancer tool to help you balance that risk across your entire portfolio.
Through the process of helping tens of thousands of investors track more than $20 billion in assets, we’ve also figured out — through a combination of hard work, historical analysis, and trial and error — how to painlessly use our software to solve a number of other consistency and precision problems that investors struggle with on their own.
Perhaps we can help you as well.
Richard Smith, PhD
CEO & Founder, TradeStops