Friday, February 5, 2016

Relationships as Emotional & Intellectual Diversification

In a recent post, I discussed some strategies for dealing with volatility in financial markets. I was reading a blog post by Robin Rifkin this week, and realized that I’d focused exclusively on what one could do at the individual level. Reading Rifkin, it became clear that a strategy I’d missed was to surround oneself with people who were able to be calm in the face of market vicissitudes. Finding a community of thoughtful investors should certainly be a priority – and this includes both the living and the “eminent dead”, as Charlie Munger calls them.

I almost wrote about finding a community of “like-minded investors”, though, and that struck me as a dangerous turn of phrase. I’ve written before about the risks of dogmatism and herding. In some ways, portfolio theory offers a useful analogy. A portfolio is improved by including assets that are uncorrelated. Similarly, one’s emotional and intellectual life is improved by diversity (within reason, of course. In a portfolio, you don’t want lack of correlation for its own sake – naturally, you want assets with positive future returns. In life, people who offer emotional and intellectual diversity may have other flaws that make it less worthwhile to associate with them. And of course the analogy has its limits. In portfolio theory, the Holy Grail is finding negatively correlated assets. If I had a friend who was delirious happy when I was very sad, I’d find that either rude or downright bizarre!)

So, to summarize: Rifkin is 100% correct that the right commentators and investors can provide a steadying hand during uncertain times, and he seems to have assembled a diverse group to lean on. The latter point is essential, and perhaps under-appreciated, in a world where we need relationships for emotional and intellectual diversification.

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