Investment is like a box of chocolates

Chocolates mean uncertainty? Not to my way of thinking. I associate a box of chocolates with choice: everybody is looking for something different. And there’s an investment lesson in there, if you look closely.

Chocolates–British style

Let’s deal with the chocolate thing first. When I was growing up, one Christmas tradition in my family–as in many British families – was to buy a big tin of chocolates (like the one in the image above) that lasted throughout the holiday season.

You’ll note that the chocolates are individually wrapped in very distinctive wrappers, so it’s easy to remember which is which. Just about every British person can tell you that the round yellow thing is a toffee penny, the big purple one has a hazelnut in it, and so on.

So when Forrest Gump uttered his famous line in the 1994 movie that “My momma always said, ‘Life was like a box of chocolates. You never know what you’re gonna get’,” there was a whole nation–sixty million of us–whose response was that his momma was wrong; everybody knows exactly what they’re going to get. And if you’re not sure, then you just consult the handy little guide they put in every tin.

That’s why, for me, there’s no uncertainty in chocolate.

What there is, though, is favorites. Tastes differ. Everyone is looking for something different.

Investment is like a box of chocolates

Investors, too, are all looking for something different. And understanding those differences can open up some valuable opportunities.

Investors do not all have the same circumstances. And the more clearly you understand what you are looking for, the more successful you are likely to be. That’s because investment differences transform a zero–sum game (which is the nature of a lot of investment activity) into a non–zero–sum game.

It’s just like the chocolates. In my family, the most popular chocolate was the vanilla fudge. Those rarely survived past the first few days so if you wanted your fair share of them, you needed to be quick. The coconut éclair, however, was a different matter. Nobody else in my family liked the coconut éclair. But I did, and that was terrific; I knew that if I didn’t eat it immediately, it would still be there at the end with the last of the coffee creams and the universally unloved peanut cracknel.

The coconut éclair situation was a good situation for me, and it came about because I knew what I was looking for.

Similarly, when we can identify investment choices where we’re looking for something different than other investors, it’s generally a good situation. Not every investment is a vanilla fudge that we all place the same value on–the coconut éclairs are out there, too: in a previous blog post I listed seven examples of situations where investor differences may have created a non-zero-sum game.

These situations offer ways to invest better without having to be smarter than a whole range of other investors who are trying to do exactly the same thing you are doing. This is not about market inefficiency. It’s not about the mispricing of assets. Like when you’re selecting a (British) chocolate, it just needs you to know what you are looking for.

A chocolatey afterthought

I received an extra lesson (about change) a few years later when I took a tin of chocolates to work to share with my co-workers, many of whom turned out to have a taste for coconut éclairs. For a brief moment, I was thrown, but I soon learned to adapt my selection tactics. If the demand for chocolates can change, investment market dynamics certainly can too.