FOOL'S EYE VIEW
Problem Solve Your Way To Greater Wealth

By David Kuo (TMFDragon)
December 6, 2001

Carburton Street, London -- Do you know the difference between problem solving and firefighting? If you find that you are regularly returning to jobs that you thought were completed -- only to have to redo them -- then you perhaps fall into the firefighter category. The problems or jobs that you thought you tackled adequately were most probably not solved properly the first time around. You most likely provided quick patch-up jobs in the hope that the problems would somehow go away.

But if you are constantly firefighting, rushing about putting out one brush fire after another, then you need to take immediate action to remedy the situation. This is because firefighting consumes valuable resources and saps energy. Over the longer term, this can damage not only your wealth, but also your health.

Recognising that you are in a firefighting situation is the first step to your rehabilitation. If you find that you have just too many problems and not enough time to solve them, then this is a good indication that you are a firefighter. If problems recur because the initial solutions were inadequate, then this is another good warning sign. And if your overall performance in life droops, then you are spending far too much time firefighting and missing out on opportunities elsewhere.

Firefighting is largely the result of attempting to provide solutions to a problem because of a lack of time or perhaps financial constraints. Tackling a problem requires time to diagnose the symptoms and it also needs a total understanding of the issues at hand. The problem solver will need to separate symptoms from causes. All too often, a firefighter will treat the symptom and not the cause -- only to find that, like a smouldering brush, it re-ignites and bursts into flame again.

Hasty problem solving is also known as patching and anyone familiar with Microsoft's (Nasdaq: MSFT) operating systems will be all too familiar with patches. The software giant, in its attempt to get new operating systems onto the market as quickly as possible, will sometimes leave minor bugs unfixed. This is principally because the company's products might not be tested to the point of destruction. Instead, patches are sent down to registered users to smooth over minor snags as and when they appear. It is arguable whether patching is acceptable, but some cynics suggest the software giant is simply using its worldwide customer base as an extension of its own quality control department. In that case, maybe patching might be an adequate solution.

But in general, patching is not a good idea. It leaves the root cause of the problem unsolved, only for the problem to resurface again at some later date. These problems lie in wait, skulking, and might remain dormant if they are left unchecked. They could even create more problems with slightly different symptoms, and these may not be immediately apparent as recurrences. As the number of hidden problems grows over time, the frequency of their return will mushroom until you find yourself rushing about from one brush fire to another. Not a pretty sight! And the frequency of firefighting will just increase until the only solution is to shut down and restart completely.

Well, that was cheerful! But what does it have to with personal finance?

Let us take the example of a share portfolio that is looking a tad under the weather. The first thing that you shouldn't do is tinker with it. This is tantamount to patching. Remember how patching simply disguises the problem and how those problems will just come back to haunt you? It can be very tempting to jump in and do a bit of pound cost averaging. But you might just be throwing good money after bad in the hope that your average losses will look a little better. You might even be tempted to trade yourself back into profit. That would really be patching on a grand scale.

So what should you do instead? The first thing would be to set up a control. Look at how your portfolio is doing against some benchmark. The FTSE All-Share Index would be a good place to start. Determine whether your portfolio is faring any worse than the general stock market. If not, then you are probably worrying too much over nothing. But if you are performing significantly worse than the market, then look at each company in turn. Examine the fundamentals of the company and find out if you have bought a pig-in-a-poke. And if you have, then put the beast out of its misery!

If you are now happy with your lot, go back and consider topping up on some of the underperforming shares. But remember, you are investing for the long haul. If you feel that you lack some of the necessary skills to pick stocks in certain sectors, then you could consider a tracker for that particular sector. This is known in the trade as 'outsourcing the problem'. It is quite a useful, and low cost, way of letting someone else solve the problem for you. It also gives you more time to focus on the other sectors that you might have more experience in.

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