Buffett and the Investment Process

Buffett does not believe that successful investing is a function of exceptionally high IQ or inside information.  According to Buffett, investors simply need a rational framework and the discipline to control their emotions.  Buffett has such a framework which he has used to amass his vast fortune.  In contrast, most investors have no such framework and are therefore thrown about by investment fads, faulty theories and emotions.  Often, their methods amount to little more than buying stocks because they going up and selling them because they are going down.  From time to time, these investors obtain a good result and mistakenly attribute it to skill.  These premature declarations of victory are frequently followed by recurring poor outcomes that can permanently destroy capital and erode investor confidence.  These investors not only lack a rational framework, but also they fail to make the fundamental distinction between process and outcome.

To understand this distinction, imagine a gambler playing high-stakes black jack at a crowded table.  After placing a large bet, he draws a hard 17 with his first two cards.  Instead of standing on the hard 17 as the mathematics of optimal blackjack play dictate, he motions the dealer for a hit and draws a 4 for a perfect 21.  In this case, the gambler gets a good outcome but his process is flawed.  He may have won the hand, but in the long run he will produce a poor outcome – he will lose a lot of money – if he continues to use a poor process – ignoring the mathematical rules of optimal blackjack play and playing by gut instinct.  Casinos understand this very well and relentlessly focus on having a good process, which for them means only playing games where the house has a mathematical expectancy of winning.

There is a strong tendency if you get a good outcome to mistakenly attribute it to skill.  This is dangerous because it can lead to costly mistakes and will fail to produce consistently good outcomes.  This is why Buffett says that during a bull market you don’t know who is swimming naked until the tides goes out.  A sports team may win some games with a bad process, but you cannot build a championship organization without a good process.   Moreover, the inherent long-term nature of many endeavors makes focusing on process even more important.  For example, it takes five years to know the outcome of a baseball draft.

If you want to improve your investment results (outcomes), thoroughly review your investment process and make changes wherever necessary.  Reviewing my investment blueprint may help you do this.


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  1. Pingback: Bruce Berkowitz’s Game Plan for Getting Rich | GregSpeicher

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