In investing, the term “optionality” represents the value of the options available to us after making an initial investment. In the world of investing, whether personal or corporate, optionality is the sum of the values of all the options created by a decision.
I have always believed in the concept of optionality in life, in business and in investing. For example, my decision to study finance in undergraduate school, when I did not really know what I wanted to do later, was driven by the desire to keep as many doors open as possible. As the popular expression goes, I try never to “paint myself into a corner.”
On a personal level, I think of decisions such as getting married, having children or choosing our course of study. Taking drugs for the first time is another decision that could prove irreversible.
Several times in the past, I considered investing in a condo in Florida. One of the main reasons that always held me back is related to optionality: I always thought that owning a condo in Florida (or elsewhere) would close off many possibilities to travel all over the planet. In my opinion, someone who owns a condo in Florida is likely to feel “obliged” to go there, which could prevent them from taking other trips they would have enjoyed.
In business, some strategic decisions require deep reflection before committing to them. This is especially true of a major acquisition, which will be difficult to reverse if it does not work as well as expected.
Another irreversible decision is selling one’s business. I was recently speaking with a friend who received an offer to sell his business. He is thinking it over, but such a decision carries major consequences, because it is the kind of choice that one cannot go back on.
Jeff Bezos, CEO and founder of Amazon, wrote in the past about the types of decisions a company faces, notably in the company’s 2015 annual report. Bezos distinguishes between two types of decisions:
“One-way doors”
“Some decisions are consequential and irreversible or nearly irreversible – one-way doors – and these decisions must be made methodically, carefully, slowly, with great deliberation and consultation. If you walk through and don’t like what you see on the other side, you can’t get back to where you were before. We can call these Type 1 decisions.”
I consider the United States’ decision to attack Iran to be the “one-way door” type. Once they have gone through that door, they are entering unknown territory and it becomes difficult, if not impossible, to return to square one. I hope this decision was made rigorously and with a great deal of deliberation.
“Two-way doors”
“But most decisions aren’t like that – they are changeable, reversible – they’re two-way doors. If you’ve made a suboptimal Type 2 decision, you don’t have to live with the consequences for that long. You can reopen the door and go back through. Type 2 decisions can and should be made quickly by high judgment individuals or small groups.”
My decision to study finance in undergraduate school was a two-way door: I could easily have reversed it, and it opened more doors for me than it closed.
In investing, several decisions are, in my view, one-way doors:
The decision to sell everything and exit the stock market is one of them, at least to a certain extent. Although one can always decide to return to the stock market after having sold everything, that decision becomes difficult afterward, largely because of psychological biases: if the market then rises, the investor will feel that he has missed the boat; if it has fallen, he will believe he made the right decision to sell and will not necessarily want to buy back in.
The decision to drastically change one’s way of investing or one’s investment philosophy, for example by selling one’s stocks to buy stock market indexes. In a recent Wall Street Journal article (Investors Must Fight the Urge to Make Big Moves), Jason Zweig writes: “You should think about overhauling your portfolio the way people should—but often don’t—decide about adding tattoos or body piercings.” In my opinion, many investors could be currently tempted to buy what has performed very well in the stock market over the past year: AI, North American stock market indexes or natural resources.
As Bezos says, before making such decisions, one must reflect at length and in a methodical way.
Philippe Le Blanc, CFA, MBA
Chief Investment Officer at COTE 100
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This article is also published on 
(in French)
