Recently I was helping my eight year-old with her math homework. An impatient young lady, she tends to calculate in her head instead of showing her work. I am trying to impress on her that this habit increases her likelihood of error and will wind up costing her time and more.
I have learned this lesson the hard way. Over the first year and a half of my portfolio management career I generated what felt like an inordinate number of trading errors, due generally to impatience. Rather than allow those errors to threaten or cut short my PM career, I managed to learn from them. I harnessed trading errors to make myself a better portfolio manager.
Somehow I was luckier than I deserved and my biggest errors always managed to be in the client’s favor. But even a trading error in your favor is a red flag and it’s a red flag to your colleagues. If you ask me, nothing seems to last longer than the eternity of having peers, compliance, and back office staff standing around discussing YOUR error, followed by the compliance officer drafting the communication to the client. If what had triggered my errors in the first place was impatience, enduring the aftermath clarified my need for patience.
Despite being lucky so far with errors in our clients’ favor I knew better than to play trading error roulette with the rest of my career, so I resolved to engineer my errors away. But how? Vacuous pledges like “be more careful” and “don’t rush” conveyed the spirit but they didn’t spell out what, specifically, I could do; and specifics were what I wanted.
So I built my own portfolio management checklist.
I started by studying my past errors and analyzing them forensically. I traced them backward, identifying how I could have or should have avoided them. These “how to avoid” items became the reconciling and validation steps in my portfolio rebalancing/trading checklist.
After assembling and following the checklist not only did my error rate diminish rapidly to near zero but I also never made the same error twice. Years before Atul Gawande wrote The Checklist Manifesto, I had already figured out the value of using a checklist for myself. Creating and adhering to my checklist did not merely extend my portfolio management career, it made me a better portfolio manager.
Years later I was recruited to a different firm and I adapted my checklist to the new firm’s systems. I created my own visual dashboards that alerted me at a glance if something were out of line, and added system checks that automatically emailed team members about the checks and the integrity of the data behind the checks. Trail or beat the benchmark, I no longer lost sleep again over the possibility I might have mishandled a trade.
Using a checklist can feel like showing your work in a math problem: it can seem slow, tedious, and painstaking. But it pales in comparison to the tedium of enduring the aftermath of an avoidable error.
Now if I can only get my daughter to show her work.