In my capacity as assistant professor of
logistics at the US Army Command and General Staff College, I have
been doing some work with complex adaptive systems and the
characteristics of learning organizations. One of the things that
continually emerges from that stew is the challenge of assessing a
dynamic environment in order to act with a degree of confidence
under conditions of unavoidable uncertainty.
When the dimensions of change in the environment also change
their frequency, intensity, duration and sequence, then you want to
see that your assessment instruments adapt to the new parameters or
you could be concerned that you are no longer calibrated to the new
With that in mind it’s fair to ask yourself
as a trader "How am I staying in touch with an evolving market?
Are my beliefs adapting and evolving in synch with the
market? Do I know the limits of the usefulness of my beliefs? Do I
know the conditions under which certain beliefs are more useful than
others? Do I have a way
of choosing the appropriate point of view based on the current state
of the market or the world? Do
I have a way of translating my current confidence level in my
beliefs or indicators into a level of risk?"
A simple way to think of this dynamic in
practice is the belief that price levels that were once resistance
can become support, once price can break through and stay above the
upper limits of a trading range. The set of behaviors to take when
you think you are near support are different than those when you are
near resistance, yet we are talking about price at the same level.
What evidence is required for you to change your point of
view under these conditions? Are
these rules explicit or are they based on feelings?
How do you validate, update and manage these competing
beliefs? How are they integrated into your overall belief structure?
These are all questions that a trader addresses either
explicitly or implicitly as the trading system is defined.
Remember, you have a system whether you design one or not.
Also remember, your system is what you do, not
necessarily what you have committed to paper. And in the space that
distinction creates psychology enters, whether we are aware of it or
Just as it is useful to examine the beliefs
inside a specific trading system, it can be useful to examine your
investment management strategy.
For the purpose of this article, consider your investment
strategy as your plan to integrate the various investment strategies
you have selected as appropriate for your objectives.
You can think of your strategy management system as the rules
you will use to assess the performance of individual systems and
their continued suitability for inclusion in your overall strategy.
Unless you are committed to flying blind, you must periodically
determine if the system is still performing as designed, and then if
it is still appropriate for your objectives. Finally, you need to
decide how much of your portfolio should be allocated to that
Try this experiment: Stand back from the daily
operation of your various systems and examine how you answer these
questions. Do you have a
routine for examining these questions or do you wait for a
significant emotional event to examine these issues? If you wait for
the emotional event, have your decisions, in retrospect, added
value? If not, is this a
pattern that also occurs inside the operation of your trading
systems? In other words, is your habitual response to emotional
events a valuable part of your investment system or do you flit from
system to system on a whim? Look for a connection between how you
perform in the management of individual trades and how you manage
the integration of your various strategies.
But if you are examining your investment
strategy routinely, you can look to see if the review frequency
occurs often enough to make decisions in time, or if your reviews
tend to be too late and only produce explanations. Ideally, we want
our reviews to enable effective decisions in time to make a
You can also examine your criteria for making
decisions to see if they truly are measuring things that matter,
that the measurements are providing actionable information, and that
the measurement scale somehow reflects the sensitivity required for
the decision area. In other words, you may not want to have binary
(Yes/No) criteria if the dimension you are measuring is best
understood on a sliding scale or measured by degrees. We are
cautious and humble enough to remember that, paraphrasing Einstein,
not all the things that count are countable.
In the same way, he who controls the agenda,
controls the outcome; he who selects the measuring device, selects
the result. If you
commit to "analysis- based management" (and it's hard not
to because it’s scientific!), then selecting the metric and the
scale to use, and the interpretation of the result is all important
because that definition produces the results that determine success
When military officers begin their training on
the Military Decision Making Process (MDMP), they learn about
selecting evaluation criteria, in order to fairly compare and choose
among different courses of action. Early in their training, it is
not unusual to observe a "check the block" mentality, with
little thought given to how they will measure the criteria down the
road when we are comparing between courses of action.
If the evaluation criteria are fuzzy, then the
"measurement" can be spun, consciously or unconsciously,
to get what you want. Eliminating
the fuzz up- front is perilous too though: if you pick the wrong
"precise" measure, then you will be wrong with much
greater fidelity. Should
you use a sliding scale or a Yes/No standard?
And there are categories of problems that may not be
measurable or may only be assessed qualitatively (like areas that
require a value judgment).
Finally, consider two management strategies:
managing by walking around (MBWA) and evidence based management
(also known as fact-based Management). These two management
strategies are almost philosophical opposites, and are usually
associated with the ongoing management of policy initiatives or
In MBWA, the driving concept is to get out of
the office and into the world of live operations where plans are
being implemented in real life. Proponents of this strategy argue
that you need the physical confirmation of real world experience to
fully grasp what’s going on. To apply this strategy to your
trading, you might focus on daily after-action reviews of your
trades and compare your trading decisions to your rule sets and look
for problem areas or value added areas to help you amend either your
rules or your behaviors.
Proponents of evidence-based management on the
other hand, want to focus on measurable facts, removing emotion and
“in the heat of the moment” perceptions, which may bias their
judgment. Applying this strategy to your investment management might
lead you to focus on the statistical performance of a population of
trades and perhaps comparing different systems across different
dimensions of performance that are related to your goals and values.
Is one strategy “better” than the other?
I submit that both can have their place as you manage your
investment strategy. They are not mutually exclusive, and since I am
a natural hedger, I have come to appreciate both the insights that
can come from the intuitive “management by walking around”
approach, as well as the systematic approach of evidence based
management. The most important thing to me is that my strategy is
intentional. I want to be an actor, not a re-actor, because I
believe that is my best strategy for avoiding “meltdowns”.
Best wishes for success as you grapple with
About the Author: Ken
Long, a retired Lieutenant Colonel in the U.S. Army with a
Master's Degree in System Development, is currently a professor of
tactics and logistics at the Army's Command and General Staff
College. He has developed the Tortoise Method
of mutual fund switching, a trading system that takes about five
minutes each week with a goal of outperforming the S&P 500
Ken is the instructor of our
upcoming Highly Effective ETF and Mutual Fund Techniques
Workshop, in Cary, NC and a co-presenter with Van at our Blueprint
for Trading Success Workshop.
He is a trader and writes a daily
and weekly market assessment for mutual funds and exchange traded
funds. He is a proud husband, dad, and
ju jitsu practitioner.