HOFFMAN,
WHITE & KAELBER FINANCIAL SERVICES, LLC
Investment
managers & WEALTH Advisors
June 6, 2007
This is the June 2007 Wealth Management newsletter from Hoffman, White & Kaelber Financial Services, LLC. If you do not wish to be included in our circulation, please reply indicating your desire to be removed and we will be happy to oblige. Alternatively, any of your friends or colleagues may receive this on a regular basis by entering their email address on our list-server via this link. Feel free to forward this to any of your friends who may find it useful. Thanks for your interest and we hope you enjoy the letter.
The Power of Rigorous Thinking
“Everything
should be made as simple as possible, but not one bit simpler.”
- Albert Einstein, (attributed)
To what
degree do we heed the advice of others and who do we find ourselves listening
to? How do we go about choosing our investments,
the best career move or the right specialist?
How do we adapt to and navigate through uncomfortable times or
challenges? How do we evaluate new
products, processes or strategies? How do
we make decisions and how will our decisions affect our careers, our families,
and our own lives?
When life
is comes at you fast, it is often very temping to just consider "quick-fix"
answers or solutions for challenges at work or at home. The desire to resolve issues rapidly, so you
can get on with things, is understandable.
But indulging this impulse can often produce a damaging outcome. We may be prompted to act on an issue that we believe
we understand, while actually lacking a complete set of facts or operating
under some poorly established assumptions.
When we over-simplify a complex problem, this often leads to simple
"solutions" that can make matters worse. “Quick-fixes” lack rigor.
On the
other hand, rigorous thinking doesn’t mean we have to be all-knowing before we
make a decision – paralysis from analysis does not provide optimal outcomes
either.
To think rigorously
means making your best effort to ensure that solutions are developed through an
adequate combination of reason, logic and available information. The power of rigorous thinking can be found
in the quality of the results from our decisions made and our actions taken. With rigorous thinking we can expect that our
conclusions will be accurate given the purpose of the exercise, the resources we
have available and the effectiveness of our efforts. A rigorously made decision, more often than
not, ensures our abilities in achieving the results we desire with a minimum of
unanticipated consequences.
At Hoffman,
White, & Kaelber Financial Services, LLC, we are committed to providing our
investors and readers with every advantage when trying to preserve and grow
their human, intellectual and financial wealth.
We seek to empower you with the results of careful, deliberate and
rigorous thinking.
In this
newsletter we will provide you some insight as to what it means to think
rigorously and how doing so may improve the desired outcomes of your decisions
made. If you are looking for information
and ideas to help you achieve greater success in your endeavors, we think
you’ll get a great deal from this newsletter.
Then, be sure to look over our market comment and performance data at
the end. Our ETF strategy achieved its
best single month returns ever! Our performance
for May 2007 was up 5.57%, putting our 3 month and year to date returns at +11.23%
and +9.60% respectively. For more
details, go to www.hwkfs.com.
What is Rigorous
Thinking?
Can you
tell, by looking, when someone is thinking?
Because thinking is an inferred process, I’d say, probably not. Cartoonists will often draw gears meshing and
turning about a character’s head to illustrate this. Or they may draw an image of smoke coming out
of someone’s ears as to depict them as thinking hard about something. In real life, however, we can only infer
that it has occurred when we see the answers or actions that people arrive at
as a result of their thinking. If we
simply take it on face value that the thinking was rigorously done we can often
be misled.
So far, it
may sound like “rigorous thinking” is one of those nebulous terms like “love”
or “wisdom”. When asked, many people have
found these words very hard to define.
Rather than push to be exhaustive, we’ll offer up a working description
that should help you begin to understand “rigorous thinking” in the same way
that we do and practice in our offices.
Let’s begin
by asserting that “rigorous thinking” is a disciplined, considered approach and
process to thinking that involves questioning one’s own assumptions in the
pursuit of intellectually honest answers and solutions. Wasn’t that a mouthful?
This
approach and process requires us to contemplate problem solving, whether
individually or in a group, on two dimensions.
The first dimension involves considering: (a) what we think about (the
content of our thoughts); and (b) how we think (the thinking and collaboration skills
that we apply in tackling the query).
And, the second dimension involves: (a) critically evaluating and assessing
the applicability of our existing knowledge of the subject; with (b) the
potential need of gathering and introducing additional information into the mix.
One of the
better guides for helping to assess the degree of rigor to be employed in a problem
solving session, or in setting higher achievement goals for a group, is a tool
developed by staff of the
First,
there is the KNOWLEDGE continuum, which describes the increasingly complex ways
in which we think. The low end involves
acquiring knowledge and being able to recall or locate that knowledge. The high end labels the more complex ways in
which individuals use knowledge, such as taking several pieces of knowledge and
combining them in both logical and creative ways.
The second
continuum, known as the APPLICATION model, is one of action. Its five levels describe how knowledge is put to
use. While the low end is knowledge
acquired for its own sake, the high end signifies use of that knowledge to
solve complex real-world problems and to create unique projects, designs, and
other works for use in real-world situations.
|
KNOWLEDGE |
6 Evaluation |
Assimilation Extend and refine gained knowledge
to be able to routinely analyze challenges and create solutions |
Adaptation Achievement of the competence to apply
knowledge and skills in complex ways.
Confronting unknowns, creating solutions and taking actions
that further develop skills and knowledge. |
|
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5 Synthesis |
|
||||||
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4 Analysis |
|
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3 Application |
|||||||
|
Acquisition Obtaining and storing bits of knowledge
and information |
Application Use acquired knowledge to solve problems
and design solutions for both predictable and new situations |
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|
2 Comprehension |
|
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|
1 Awareness |
|
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|
|
|
1 Knowledge in one discipline |
2 Apply knowledge in one discipline |
3 Apply knowledge across disciplines |
4 Apply knowledge to real-world predictable
situations |
5 Apply knowledge to real-world unpredictable
situations |
|
|
|
|
APPLICATION |
|
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|
|
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As
reflected above, the Rigor/Relevance Framework has four quadrants and each is
labeled with a term that characterizes a person’s learning or performance at
that level. In any given situation or
challenge, the ability to recognize your strengths and weaknesses on both
continuums will help in understanding when and how to quantify the need for
greater rigor. And, when working in
groups, it is very important to understand and respect the level of
contribution each party brings, or doesn’t bring.
The goal of
rigorous thinking is to think in a disciplined, considered fashion as opposed
to haphazardly. Rather than an approach
of “shooting from the hip”, it involves a more deliberate action of working
through each step of the problem solving process. The power of rigorous thinking is that you
optimize your efforts; significantly build upon your existing knowledge base;
and, become able to routinely build upon and leverage your successes.
How Can You Begin to
Think Rigorously?
Rigorous
thinking doesn’t have to be slow or plodding, but it should be reasonably thorough
and complete. Some problems don’t always
require us to think rigorously. Your
first instinct may be your best. You
don’t have to know at what temperature flesh burns before you move your hand
off of a hot stove. However, when a
complex problem requires rigorous thinking, anything less will not serve you
well.
The best
way to begin is to make sure you understand the issue or challenge. You need to start off asking the right
question(s). Have you ever tried to
solve a problem and found out later that you started by asking all the wrong
questions? Come on now, be honest. Did you also find that asking the wrong or
ill-conceived questions frustrated your information source? [I’ve personally been on both sides of this
situation before.] As with any diagnosis,
masking the symptom does not cure the underlying disease. How do you work through this?
You can start
by gathering your thoughts on the topic and assembling the relevant facts
pertaining to the situation. Are you
clear about the challenge or issue? Keep
an open mind and raise several questions.
Explore some of them on your own by playing them out in your mind. Identify the key assumptions that led you to
frame those questions the way that you did.
Think out loud. Run your ideas
past a skeptic if you’re not sure. Do
you believe you know enough to answer the question? Do you need to acquire more information? Do you need to ask for input? Are you involving the right people to help
you?
Once you believe
that you have the right question(s), you should seek out two or three possible
“right” answer(s). Think out of the
box. Challenge all answers to complex
questions. Delay judgment until you have
collected a reasonable amount of facts. Identify
things you might not have considered the first time through. Look for them. Are there potential consequences arising out
of the anticipated results from your first solution that are unwanted or
troublesome? From your second? From your third? Which can you live with?
Spend some
effort analyzing your ideas from various points of view or fields of
thinking. Often common knowledge in one
field leads to amazing breakthroughs in other fields. This is where diversity in thinking is
valuable. You can do this by shifting
your own frames of reference, or by involving different types of thinkers in the
process. Have the courage to question
your own logic. “Nobody is as smart as
everybody.” – Daniel
Elash, (attributed)
Tie your
various threads of thinking into the simplest explanation that handles all of
the facts (this may be easier said than done).
It may seem quicker to discard facts that don’t fit, but when this
happens you must be sure that the fact is truly irrelevant or recognize that
this may indicate a pre-conceived bias that will keep you from the best right
answer. Build various good ideas and
multiple perspectives into an outstanding answer.
Finally,
evaluate your answer from the points of view of other constituencies. Does it solve the core problem or answer the
key question? How well did you work the
process? Were there flaws in your
process? Was your thinking
rigorous? Finally, assess the strengths,
weaknesses and unexpected implications of your answer. And, remember that creating solutions while
working from erroneous assumptions, or thinking from a narrow perspective,
and/or indulging personal biases, leads to poor or stagnant results.
Think of
the ancient sailors who never left the sight of shore for fear that if they
sailed too far they would fall of the edge of a world they thought to be flat. Ancient maps that noted, “beyond this point
there be dragons and demons,” limited the choices of all but the most intrepid
explorers. Thinking evolves by adding
new data points and forming insights built on accurate extrapolations arising
from that additional knowledge. Just
coming up with an answer is not proof of rigorous thinking.
What are the Benefits of
Thinking Rigorously?
Decisions,
decisions, decisions… Whether for
business or personal pursuits, our lives unfold through the decisions we
make. Good decisions bring smiles,
confidence and benefits or profits; and bad decisions bring frowns, insecurity
and costs or losses.
Rigorous
thinking helps minimize the “Accuracy Gap” and can dramatically increase the
quality and effectiveness of our decisions.
An “Accuracy Gap” exists when we allow erroneous assumptions,
miscalculations or conclusions to lead us into costly decisions. In business, this “Accuracy Gap” often
introduces unacceptable risk and unnecessary costs into critical management
decisions. And, it is the reason that
certain projects or under-takings do not deliver the predicted value sought.
As a result
of working a considered, disciplined thinking process a number of consequences
can emerge. You develop a deeper understanding
of the problem that was vexing you or limiting your success. Think about it. If you know how to solve a problem it isn’t a
problem. The vexing, or recurring,
problems are the ones that lie beyond your usual approaches. New understandings, new perspectives, and new
information are usually required. In the
famous quote from Einstein, “Insanity is doing the same thing over and over
while expecting different results.”
A second
by-product is that you have exercised your thinking muscles, stretched your
frame of reference, and developed more confidence in your ability to tackle
tough problems, think innovatively and make better decisions. We strongly believe that if your thinking
isn’t driven by the emotions of fear or greed, if your perspective is less
narrow, and if you are not bounded by erroneous assumptions you’ll become a
savvier, more successful investor no matter how good you are at the moment.
By thinking
rigorously, you will ultimately increase your intellectual capital; capital
that you can spend to build both your wealth and the quality of your social
life. You will strengthen your sense of
competence as well as your overall effectiveness, and the additional skills are
yours forever.
Hoffman, White & Kaelber Financial Services Investment
Performance Update
Global
Insight reports: “The world economy is expected to grow 3.5% in 2007 and 2008,
a pace that is near its expected potential. Despite the pronounced slowdown in the
After a
first-quarter lull, the
Bottom
line: The world economy seems to have
strong momentum, and the risks look to be shifting to the upside. Rapid liquidity growth, rising asset prices,
and inflationary pressures could lead us into a boom-bust cycle. And, stronger global growth and inflation could
prompt more aggressive tightening of monetary policies, which would probably
set the stage for weaker performance beyond 2007.
For the
month ended May 31, 2007, our one-month performance is up 5.57%, our three-month
return is up 11.23%, and our average annualized return since inception is up 10.83%. Our since inception risk measures edged upwards
slightly, but remain very conservative at +/- 6.52%, and our since inception Sharpe
Ratio (reward for risk taken) remains very respectable at 1.21.
For more
performance information, please see our web site for details.
Want better long-term results from your investments?
Choose Us As Your Investment Manager!
Research us on the web at www.hwkfs.com