One of my favourite books that is not about investing and yet, I feel, contains investment wisdom is The Perfect Storm (Sebastian Junger, 1997). Those of you who have read it (or even those who have suffered through the terrible film adaptation) know that it is the true story of a fishing boat that sank in the Atlantic in 1991, with spectacular explanation of the causes and processes that led to the tragedy.
I particularly like the following extract:
In a sense Billy's no longer at the helm, the conditions are, and all he can do is react. If danger can be seen in terms of a narrowing range of choices, Billy Tyne's choices have just ratcheted down a notch. A week ago he could have headed in early. A day ago he could have run north like Johnston. An hour ago he could have radioed to see if there were any other vessels around. Now the electrical noise has made the VHF practically useless, and the single sideband only works for long range. These aren't mistakes so much as an inability to see into the future. No one, not even the Weather Service, knows for sure what a storm's going to do…
But even if the boat doesn't get hit by a nonnegotiable wave, the rising sea state allows Billy less and less leeway to maneuver. If he maintains enough speed to steer, he beats the boat to pieces; if he slows down, he loses rudder control. This is the end result of two days of narrowing options; now the only choice left is whether to go upsea or down, and the only outcome is whether they sink or float. There's not much in between.
This is a great way to think about an underperforming portfolio. 'Danger can be seen in terms of a narrowing range of choices' - with the option to sell the underperforming stocks having passed, the portfolio now owns what it owns, and those stocks will bounce, or the manager will be sacked.
'The only outcome is whether they sink or float. There's not much in between.'
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