The Opportunity Map represents a synergistic approach to wealth management. Each component of the map is important on its own, and each component is dependent on the others for long term success.
1. Inefficiency and Opportunity
Applying The Opportunity Map means first spotting and assessing the inefficiency or opportunity. Inefficiencies in markets create pricing distortions that allow us as investors to profit through the systematic application of an investment dicsipline. Opportunities are typically unique business situations that present themselves from time to time.
Both inefficiencies and opportunities require a deployment of capital to generate profit. We believe that spotting and properly quantifying the economic proposition is key to beginning any investment. The ability to capitalize on the inefficiency or opportunity hinges next on strategy.
2. Strategy
Experience has taught us that to win in investing one needs not only a good investment discipline to win, but also the ability to execute that discipline faithfully. Often investors search for the "golden ticket" or perfect model to investing when none exists. Often they ignore the second important component of strategy, the ability to execute the investment model faithfully, when that element may be the ultimate determinant of success or failure.
Case in point. You may have an excellent model for day trading stocks that shows profits on all market conditions and with minimal downside risk. That same model may require you to sit in a room in front of a computer during market trading hours every day the market is open. Are you able to do this? Are you willing to do this?
Both components, the investment discipline and the ability to execute that discipline faithfully, are in our minds inseparable and crucial to investment success.
3. Process
Once the strategy has been developed, choices need to be made as to how to create a framework within which to execute the discipline. Legal structures, accounting protocols, performance measurement benchmarks and much more needs to be determined and assembled.
4. Risk Management
The path to wealth creation and wealth management is first paved with the avoidance of loss. It's very difficult to make money if one has to overcome out-sized losses. We recognize that it's impossible to invest without incurring risk and therefore losses. However, minimizing those losses is crucial to solid risk management and success in investing. To illustrate the point, losses are geometric. Overcoming a 10% requires only an 11% gain. Overcoming a 50% loss requires a 100% gain.
The risk management development has a direct connection to strategy development. Without risk management, the strategy is incomplete.
5. Execution
As discussed above, having a robust investment discipline is important. But the ability to actually implement that discipline is equally so. We bring a strong focus to bear on execution of the strategy as crafted. The business model drives the structure and the faithful implementation of the plan can determine ultimate success.
As described in our above example, if you are unwilling or unable to be in front of a computer terminal day in and day out to execute a day trading strategy, then this is a strategy best left to others as you will be unable to faithfully execute the disicpline.
6. Evaluation
And finally, ongoing evaluation and measurement of success or failure is key to monitoring the sucess of your investment program. Without timely feedback and reporting, strategic decision points can be missed, flaws in the strategy go unrecognized and the ultimate ability of the program to be successful is compromised.