The third idea to improve your investment process is to not focus on the outcome. One of the interesting ironies of most activities is that if you focus on the outcome, you’re less likely to achieve it.
A few years ago, Michael Lewis wrote a book called Moneyball. The book tells the story of how Billy Bean built the Oakland A’s into a winning baseball team in spite of having an undersized payroll. Bean worked side by side with a wizkid from Harvard named Paul DeDodesta. Together they used creative thinking and statistical analysis to find undervalued players for the A’s to draft.
For a few years, DePodesta maintained a blog on baseball called “It Might Be Dangerous… You Go First”. In one memorable post, he wrote about the relationship between process and outcome. He tells the story of an evening in Las Vegas where he observed a game of black jack. He saw a player draw a seventeen and then, to the surprise of the dealer, ask for a hit, which is a sub-optimal choice. The player drew a four and won the hand. The dealer responded, “Nice Hit!”
DePodesta spent the rest of the evening thinking about what he had observed and the relationship between process and outcome.
He concluded that the blackjack player had had a good outcome, but a bad process.
It’s easy to fall into the trap of overemphasizing the outcome. After all, results are what matter and people mistakenly believe that a good outcome implies a good process. That’s a false assumption.
The best hope for a good outcome is a good process. You should focus on what you can control. The odds are stacked in favor of the casino, but it doesn’t win every hand. The casino is profoundly interested in a good outcome, but to achieve it, it maniacally focuses on the PROCESS.
A bad process can also lead to a good outcome, as we saw in the blackjack story. This is, according to DePodesta, the “wolf in sheep’s clothing” that “allows for one-time success but almost always cripples any chance of sustained success.”
FOCUS ON HAVING A GOOD PROCESS
What you should be after is “deserved success” which is a good outcome that results from a good process. This is where championship sports franchises like the Patriots or the Steelers live, or great investors such as Warren Buffett or Seth Klarman.
Even great achievers experience failure and make mistakes. Having a good process and getting a bad outcome is a tough reality of operating in areas that involve uncertainty and luck, such as investing. Nevertheless, focusing on a good process is the best path to sustained success.
It’s tough to admit that you’re lucky when you undeservedly get a good outcome, but it’s critical in order to improve. According to Paul DePodesta, Billy Beane was successful because he was quick to notice the role of luck “embedded” in a good outcome. Beane refused to congratulate himself when this happened.
This is what Buffett is getting at when he says that you don’t know who’s swimming naked until the tide goes out. When everything’s going up, there are a lot of folks running around who confuse luck and skill.
You need to guard against this tendency to judge a decision based on the outcome rather than the process of what went into it.
In his 2010 letter to shareholders, Buffett commented on his process for selecting a new chief investment officer. He wants someone with a good track record, but he’s even more focused on HOW the record was achieved.
“It’s easy to identify many investment managers with great recent records. But past results, though important, do not suffice when prospective performance is being judged. How the record has been achieved is crucial…” [emphasis added]
Focus on the process, not the outcome, and you’ll improve your chance of sustained success.