Outcome vs. Process

Most investors are focused on outcome rather than process. They judge success on whether or not the value of an investment increases. While we all want to see positive returns from our investments, following a consistent process offers the best chance of sustained, long-term success.

When hearing about another investor’s successful investment, those that focus only on the outcome are more likely to wish they had shared in the success. However, those who use a well-thought-out process are more likely to ask questions like how much effort went into the research or what the investor’s overall track record looks like.

It is important to remember that an individual outcome simply represents the final score of that one event. Success or failure was due to either skill or luck in that one instance. Over long periods of time, the likelihood of experiencing beneficial outcomes can only be improved by employing an effective process.  Put simply, it is not good enough to rely on luck when it comes to achieving long-term goals.

In investing, like sports, those that achieve the most success are typically those who consistently implement a well-thought-out process. On occasion, less than desirable outcomes may result. In response, process-oriented individuals will examine their methodology and try to understand where the breakdown occurred. Next, they will attempt to make changes that will benefit future performance. Those investors with a long-term approach are also more likely to be process oriented. In short, process represents the application of your philosophy.

While a good process does not guarantee success in each and every case, it certainly improves the odds. At BWFA, the equities in which we invest are chosen as a result of the consistent application of our investment process. We believe that over the long term this approach will produce better results and generate more reliable outcomes. We employ the same fundamental, bottom-up research process to every stock we select for client portfolios. We also have defined the “sell” criteria we use to guide our decision making when considering whether it may be time to exit a position.

In addition, there are many behavioral aspects of investing such as recency bias, which we discussed a few weeks ago. The consistent application of a well-defined process can help minimize the impact that behavioral biases can have on investment performance.