Wednesday, August 20, 2014

Applying Parkinson’s Law to Investing & Yielding Greater Returns

Parkinson’s Law is mostly applied to productivity which states that work expands to fill the time available for its completion – and this means that if you give yourself a week to complete a two hour task, then (psychologically speaking) the task will increase in complexity and become more daunting so as to fill that week.

Let’s now look at how this applies to investing and yielding of greater returns. I have over the years learnt that, in the course of investing, it’s better to work smarter than to work harder. Most times, it is not the amount of time you spend on cultivating a particular investment, but it’s about how smart and fast you position yourself to make the best out of that investment. If it’s a business you are investing in, if it’s a stock or bond you are investing in, it’s always good to work with time. This is because time can change the value of your return on the investment.
 For instance, let’s say Mr. A, invested in a stock, GCB and gained 100% over two months, and Mr. B invested in the same stock but gained 100% over 10 months although he could have sold in the second month as Mr. A. If they invested the same amount, Mr. A’s gains will be valuable than Mr. B’s (holding all other factors constant) in this global economy.

I know other school of thought holds the view that, holding for long as Mr. B did in the analogy could be a bargain on stock GCB’s performance and could swing in his favour. (Let’s say: 200% profit). However, it’s good to know from the start how much time you are allocating to a particular investment and what percentage gain or loss you can take. And when you reach that level, ACT fast.

There is limiting belief that working harder is somehow better than working smarter and faster. That’s related to the idea that the longer something takes to complete, the better quality it must inherently be. But this is not the case, in investing; you have to learn to work against the clock. You have to win against the clock; strive to beat it as if it were your opponent, without taking shortcuts and producing low-quality output or low return on your investment. Cut off the time-fillers and focus on the main thing.


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