The first idea to improve your investment process is define your outcome. You must have a crystal clear idea of what you’re trying to accomplish.
If your target is clear, it helps you define a good process. For example, whether your goal is to beat the S&P500 or achieve an absolute return of 15%, it forces you to think carefully about the type of strategy you’ll need to actually do it. What type of securities will you need to buy? What are their characteristics? How will you find them? What about taxes and transaction costs?
Equally important, it will give you a yardstick to say no to the majority of securities that won’t help you meet your goal.
If you’re target isn’t clear, you may be tempted to rationalize poor results. Buffett warns about shooting an arrow into a blank canvas and then drawing the bull’s-eye around the implanted arrow.
If don’t have a yardstick, you can’t measure your performance and see if you’re making progress. Without a yardstick, you can’t see if you’re actually adding value.
Isn’t the purpose of an actively managed fund – to add value?
Finally, I offer a word of caution. You can’t define success as achieving your outcome each and every year. External factors and chance have too much impact on short-term performance.
However, if you can’t reach your outcome over a five-year period, you may be kidding yourself. Your investment process may not be adding any value.