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Chaya Slain is a big believer in the work of Daniel Kahneman, an Israeli-American psychologist known for his work in behavioral finance.

“He teaches us that even being aware of our biases does not reduce the chance of being subject to them,” says Slain, chief investment officer at AdCap Management Inc. "He teaches that the only way to reduce our biases is to institute rigorous processes to guide our behavior.”

Slain came to AdCap in May after more than a decade at Parkwood, an investment office for the Mandel family and Mandel Foundation. She built an extensive network of relationships with private equity, hedge funds and real estate managers in her ongoing effort to craft a more effective investment strategy.

“I've come to recognize that as good as I may be when making investment decisions, I'm subject to the same feelings of loss aversion and greed as any other investor,” Slain says. “And therefore, I try to pull my emotions out of my decision-making and use a systematic framework.”

Smart Business Dealmakers spoke with Slain to explore the human side of investing and what she has learned to minimize mistakes.

Find your process

When everyone is making money in a certain investment strategy or in a certain stock, other people gravitate to that area because they also want to make money, Slain says.

“But ultimately what happens is that those areas become overcrowded and then the opportunity set becomes less attractive,” Slain says. “A good example of a crowded trade would be investors who got into tech stocks in the early 2000s during the internet bubble and quickly lost more than 50% of their value. Investors who are willing to think for themselves, they can find opportunities before they become crowded when there is still money to be made. You want to be in the trade before it gets crowded and then once it gets crowded, you need to get out.”

Slain graduated from Columbia University with a mathematics degree that helped her develop a highly analytical, multi-dimensional approach to investments. She then spent the first five years of her career in the investment banking division at Goldman Sachs.

“If a lot of people are making money in a certain area, you want to make sure that it's not overcrowded and that the pricing isn't too rich,” she says. “That's why you need to come up with a structure and process so that you have certain beacons to steer by in terms of how you make your decisions.”

The value of discipline

Slain is a big believer in trend following, an investment strategy that requires self-discipline and adherence to a precise set of rules that are not influenced by emotion or what others think may happen.

“People are more likely to do things that other people are doing and also things that they can understand easily,” Slain says. “Given my math background, I got to the point where I was able to feel comfortable with how these portfolios were constructed. In addition, I feel that a lot of the reasons why they work is because of behavioral biases, which I also felt I had an understanding of. I'm willing to make an investment, even if everyone else isn't doing it.”

Slain relies on finding answers to a consistent set of questions rather than basing investment decisions on how she feels at any given point in time. 

“That's not the only thing that I do,” Slain says. “I don't think that this is necessarily simple. This is the hardest game you're going to play. This is the game where you're trying to make money and if someone figured out how to how to win, then the game would be over. They would have all the money.”

A moving target

As with many things in life, that moment when you think you’ve outsmarted the competition can often have the exact opposite result.

“For example, what happened in 2000,” Slain says. “The prices of many internet stocks were very, very high. It led a lot of people to believe that they had become great stock pickers. During that period of time, there were many people who quit their day jobs to become day traders. Because the market kept going up, they kept making money and they thought that they were doing a great job. But it was a trap. Ultimately the market showed them when it priced back to appropriate levels, and pushed many of those day traders back into their day jobs.”

The market is constantly evolving and changing based on the behaviors of the people who are making investments, Slain says.

“Even if you find something that is good, as other people get involved and the price changes, it could become no longer interesting anymore,” she says. “The market is constantly evolving. So just when you think that you figured it out, it changes and you have to evolve with it again. You never really get to the point you can say, ‘OK, I beat it.’ You might have figured it out for a short period of time, but then it changes and you have to change with it.”