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AswathDamodaran1TheGrandFinale:ChoosinganInvestmentPhilosophyAswathDamodaranAswathDamodaran2ASelfAssessmentQTochoseaninvestmentphilosophy,youfirstneedtounderstandyourownpersonalcharacteristicsandfinancialcharacteristics,aswellasasyourbeliefsabouthowmarketswork(orfail).QAninvestmentphilosophythatdoesnotmatchyourneedsoryourviewsaboutmarketswillultimatelyfail.AswathDamodaran3PersonalCharacteristicsQPatience:Someinvestmentstrategiesrequireagreatdealofpatience,avirtuethatmanyofuslack.Ifimpatientbynature,youshouldconsideradoptinganinvestmentphilosophythatprovidespayoffsintheshortterm.QRiskAversion:Ifyouareriskaverse,adoptingastrategythatentailsagreatdealofrisk–tradingonearningsannouncements,forinstance–willnotbeastrategythatworksforyouinthelongterm.QIndividualorGroupThinker:Someinvestmentstrategiesrequireyoutogoalongwiththecrowdandsomeagainstit.Whichonewillbebettersuitedforyoumaywelldependuponwhetheryouaremorecomfortablegoingalongwiththeconventionalwisdomorwhetheryouarealoner.QTimeyouarewillingtospendoninvesting:Someinvestmentstrategiesaremuchmoretimeandresourceintensivethanothers.Generally,short-termstrategiesthatarebaseduponpricingpatternsorontradingoninformationaremoretimeandinformationintensivethanlong-termbuyandholdstrategies.QAge:Asyouage,youmayfindthatyourwillingnesstotakerisk,especiallywithyourretirementsavings,decreases..Itistrue,though,thatevenasasuccessfulinvestor,youwillhavelearntlessonsfrompriorinvestmentexperiencesthatwillbothconstrainandguideyourchoiceofphilosophy.AswathDamodaran4Signsofamisfit…1.Youlieawakeatnightthinkingaboutyourportfolio.Investorswhochooseinvestmentstrategiesthatexposethemtomoreriskthantheyarecomfortabletakingwillfindthemselvesfacingthisplight.Itistruethatyourexpectedreturnswillbelowerwithlowriskstrategies,butthecostoftakingontoomuchriskisevengreater.2.Daytodaymovementsinyourportfolioleadtoreassessmentsofyourfuture:Whilelongtermmovementsofyourportfolioshouldaffectyourplansonwhenyouwillretireandwhatyouwilldowithyourfuture,day-to-daymovementsshouldnot.Itiscommonineverymarketdownturntoreadaboutolderinvestors,onthevergeorretirement,havingtoputoffretiringbecauseofthedamagecreatedtotheirportfolios.Whilesomeofthemmayhavenochoicewhenitcomestowheretheyinvest,mostinvestorsdohavethechoiceofshiftingintolow-riskinvestments(bonds)astheyapproachretirement.3.Secondguessingyourinvestmentdecisions:Ifyoufindyourselfsecondguessingyourinvestmentchoiceseverytimeyoureadacontraryopinion,youshouldreconsideryourstrategy.AswathDamodaran5FinancialCharacteristicsQYourchoiceofinvestmentphilosophywillalsobeaffectedbyyourfinancialcharacteristics–yourjobsecurity,thefundsyouhavetoinvest,yourcashneedsandyourtaxstatus.QSincethesecharacteristicschangeovertime,youmayhavetomodifyyourinvestmentchoicestoreflectthesechanges.AswathDamodaran61.JobSecurityQInthemidstofarecession,eventhosewithjobsworrymoreabouttheirinvestmentsanddemandlargerriskpremiumsforinvestinginassets.Theflighttoqualityand,atthelimit,torisklessinvestmentsisexacerbatedbynaturalandfinancialcrises.QYourinvestmentphilosophywillalsobeheavilyinfluencedbywhatyouperceiveyourearningcapacitytobe.Ifyouexpecttoearnahighincomethatmorethancoversyourexpenses,youhavefarmoredegreesoffreedomwhenitcomestopickinganinvestmentphilosophy.If,ontheotherhand,yourincomebarelycoversyourexpensesorworsestill,fallsshort,yourinvestmentportfoliowillhavetobetailoredtomeetyourcashneeds.AswathDamodaran72.InvestmentFundsQYourchoicesintermsofinvestmentphilosophyexpandasthefundsatyourdisposalincrease.QWhenconsideringtheinvestmentfundsatyourdisposal,youshouldlookatnotonlyyoursavingsbutalsomoneythatyouhaveaccumulatedinpensionfunds,IRAsandinsurancesavingsaccounts.Whileyouaresometimesrestrictedinyourinvestmentchoicesonsomeofthesefunds,youhavemorechoicenowthanyouusedtoandoddsarethatyourchoiceswillcontinuetoincreaseovertime.AswathDamodaran83.CashNeedsQOneoftheperilswefacebothasindividualinvestorsandportfoliomanagersisunpredictabledemandsforcashwithdrawals.Forindividualinvestors,thismayoccurastheresultofapersonalcrisis–asicknessthatisnotcoveredbyhealthinsuranceortheunanticipatedlossofincome.Forprofessionalmoneymanagers,itarisesbecauseclientscanchangetheirmindsanddemandtheirmoneyback.Ifthisoccurs,youmayhavetoliquidateyourinvestmentsandloseanylong-termreturnpotentialthatyoumayhaveinthem.QWhileyoumaynotbeabletoforecastwhencashwithdrawalsmayneedtooccur,youcanstillconsidertheprobabilitieswhenyouchooseyourinvestmentphilosophy.Theexpectedneedforcashshortensyourtimehorizonandmayultimatelyrequireyoutoadoptaninvestmentphilosophywithashorterpayoffperiod.AswathDamodaran94.TaxStatusQInvestorswhofacehightaxesonincomeshouldchooseinvestmentstrategiesthatreducetheirtaxliabilitiesoratleastdeferstaxesintothefuture.QWhatmakestheinterplaybetweeninvestmentphilosophyandtaxescomplicatedisthefactthatdifferentportionsofthesameindividual’sincomecanbesubjecttodifferenttaxtreatment.Thus,aninvestor,whendecidingwhattobuywithherpensionfund,whereincomeistaxexempt,mayadoptastrategythatgenerateslargeamountsofcurrentincome,butwhenin