Most of us will not be responsible for investing billions of dollars, however Mohamed El-Erian is and has been through the Havard University Endowment Fund, Pimco and now Microsoft. Mr. El-Erian wrote the book When Markets Collide, McGraw-Hill, NY, 2008 and you can follow him on LinkedIn for he is a good writer with interesting insights. As your portfolio grows, you move into diversification for somewhere in the world there is always an opportunity, if your natural home declines in value. If you review mutual funds or your own holdings, you will quickly be able to see the natural home of the people operating the funds. As your funds grow, you should think and begin to act in accordance with the global economy. Insights provided by Mr. El-Erian will help you along in the process as you wish to maintain a strong performance and reduce the risk of sudden and large losses.

The first consideration is noise. Everyone comes to the table with some preconceived ideas that have been around for a long time as measured in years. The ideas are taken for granted for example lower interest rates, low inflation should stimulate the economy. They make sense, they should work and what happens when it does not as well as in the past? Is this an anomalies or will it work in the near future? Noise can matter in so far as it contains signals of fundamental changes that are not captured in conventional monitoring tools. Governments capture data and report them, then people try to interpret the numbers; asking what is not being captured is a good thing, asking what signals are in the noise is another. Then you will be in a position to begin to do something. Mr. El-Erian believed one of the root problems is the tendency of structural transformations to enable activities that initially outrun the ability of the system to accommodate and sustain them. The mismatch will continue to play out both at the individual firm and national economies. In other words, regulators and government information are one or more steps behind than the private companies ability to generate fees, particularly when leverage is involved.

Leverage enhances returns and losses, but if you are right the profits roll in. If you are right, you are bound to do more and other firms will follow the example until returns fall to what is considered normal levels. It will take weeks before regulators catch up to the firms and the amount of leverage they are taking. Thus what is an investor to do? Mr. El-Erain has some steps:

1. Identify the source of the noise that creates an unusual market dislocation.

2. Be disciplined in treating each episode of such noise as potentially containing important signals.

3. Assess the signal content through an evaluation based on the prioi modeling of the economic or market phenomenon.

4. Differentiate between factors that influence the destination and those that influence the journey when assessing the content.

5. After you have gone through the process, and not until then, you should pursue the views of the talking heads and experts.

6. Be open to finding not only cyclical influences but secular ones.

What to do is the big question and one step to take is following a simple management framework – four boxes – urgent and not important, important and urgent, important and not urgent and not important and not urgent. the axis are urgency and importance. Mr. El-Eraim’s coach at the IMF David Coleman noted most people were pretty good at recognizing what is important and urgent and they acted accordingly. They also tended to be able to identify and avoid the not important and not urgent. It is the other two boxes that separates success from average or mediocre performance.

The successful mangers never lost sight of the important and not urgent. Those tasks are highly deterministic when it comes to positioning oneself for sustained future excellence. The others got diverted by the urgent and not important tasks. Most of these end up claiming an enormous amount of time and effort but have little material impact on the longer term success of an endeavor.

Linking to dividend paying stocks, the beauty of these form of stocks is the markets will go up and down, which is a given, but if the company is profitable and pays a consistent dividend, you will continue to receive a cash flow from the holdings. If you are not leveraged, then if markets go down, but the company is still profitable, you do not have to do anything but to continue to collect your dividends and maybe add to your holdings. The price of the stocks will vary but due the dividends there will be a solid floor and will bounce back faster than non dividend paying stocks. Unless you own a tens of millions of dollars in assets, let the companies you own worry about global diversification while you earn your dividends.

There are more questions than answers, till the next time – to raising questions