Investment Frame – The Story as Decision

Ain’t only three things to gambling; knowing the 60-40 end of the proposition, money management, and knowing yourself.

Walter “Puggy” Pearson¹


The ultimate point of developing an analysis framework is to use it to invest. The tools to do this are grouped under the Investment Frame. In effect, these tools are about two sorts of decisions. What sort of stories do you want to spend your time trying to understand and having gained this knowledge, what investment decision are you going to make?

Obviously there is an almost limitless supply of possible answers to these decisions and it is tempting to ask which is the best approach? But this is the wrong question. The important question, as Puggy Pearson alludes to, is – Which is the best approach for YOU? ²

Choosing the best approach is first and foremost a personal decision. The approach must be compatible with your individual:

  • Risk preferences (volatility, capital loss, relative to index) and tolerances (maximum draw-downs);
  • Personality traits (emotional response, quantitative vs qualitative preferences etc);
  • Career objectives and restrictions (e.g. compliance rules might prohibit short term trading);
  • Means (activist investing is unlikely to be the province of individual investors; micro cap investing is unlikely to be a strategy for large institutional fund managers.

The approach must also be compatible with the investment environment. Some environments are obviously better suited to some strategies. The late stages of a bull market might be suited to short term momentum trading, but be both a lonely and dangerous place to search for deep value/discount to NTA investments.

Its important to note that the route from analysis to strategy is not linear. The choice of strategies is limited by the type of analysis that can be undertaken. In turn, both the type and detail of analysis that should be undertaken is determined by the strategy being followed. In particular, the investment strategy will influence how particular information should be interpreted. If you are following a momentum strategy, trends will likely be much more important than levels and vice versa for a value strategy.

In the Investment Frame, we have grouped our two decisions into three baskets. The first two baskets group the investment strategies around the key market stories discussed in the Market Frame. The third basket relates to how to incorporate an investment strategy into a decision making process.

  • Fundamental Strategies;
  • Market Strategies;
  • Portfolio Strategies
1.  I should credit the writings of Michael Mauboussin for alerting me to this quote.
2.  In the Intelligent Investor Ben Graham posed the question as “Should security S be bought (or sold, or retained) at price P, at this time T, by individual I”.