Are You Focused On Outcomes Or Process?

Imagine yourself as a new investor. Not quite ready to manage your own money, you decide to employ an “expert” at a nearby wealth management firm. When you arrive, you are told that you have two options of advisors.

The first follows an evidence-based approach to investing, focusing on low-cost, passive management strategies with a focus on asset allocation appropriate to the client. The second has only been with the firm for a year but returned 30% for his clients last year and has earned a superstar reputation. Who do you want to manage your money?

If you are leaning toward the latter “superstar” you are like most investors: outcome-focused. If you gravitate toward the advisor with the evidence-based approach, congratulations—you are among the minority of process-focused investors.

Is there really an important difference? Let’s define outcome and process.

Outcomes are the result. We live in an outcomebased world. We love outcomes because they are simple, objective, and measurable. Measurements generate numbers that enable our minds to find patterns. Our hardwired need to see patterns intersects with belief and hope, and we attempt to predict the future.

Only we can’t.

Like any magical illusion, it is a trick—one we play on ourselves. Outcomes are simply the end result, regardless of methodology. They are not directly controllable, nor predictable.

“Past performance is no guarantee of future results” is so hackneyed, it seems to have lost any power to provoke thought. But it's true. No sweater-vested academics are debating its validity. We know that past performance has no future predictive value. Yet the majority of investors doggedly persist in using this metric in their decision making.

We are all seeking performance. But we need to stop thinking about performance as a goal, and start thinking about it as a result. The result of what? The result of a process.

Process is powerful. Outcomes are the result of process.

Avoiding past performance to make investment decisions may feel unnerving, until you realize that the foundation for superior returns lies not in extrapolating patterns, but in following simple well-established rules.

In other words, we need to take the focus away from what we cannot control (stock market returns), and focus instead on what we can: minimizing costs, appropriate asset allocation, and proper diversification.

Superior performance as a result of sound process is not unique to finance. For example, the last several decades have seen a sea change in the field of medicine. Whereas diagnosis and treatment used to be based on tradition, anecdotes and personal experience, the dawn of “evidence-based medicine” has changed everything. Prospective, double-blind, placebo-controlled trials are now considered the gold standard in guiding decision-making in order to optimize the chances of a positive outcome. The medical community has realized that it is far more beneficial to use science as a guide than the biased and fallible individual human mind.

Of course, even when the best evidence is employed and the greatest care is taken, sometimes the outcome will be bad. This is true in medicine and it is true in investing. But if the process which led to that decision is indeed sound, neither the physician nor the investor  should change their approach. Doing so would simply sabotage their future performance.

Unfortunately, investment decisions are still too often made based on tradition, anecdotes and personal experience. This is a shame because there is an enormous body of evidence showing us that there is a better way.

The simple fact is that humans perform better when they focus on process rather than outcomes.

Consider the following real world example:

Tom Coughlin is an NFL coach. In 2004 he was hired as the head coach of the underachieving New York Giants. Three years later they won the Super Bowl. Four years later they won it again. Coughlin is considered one of the most effective coaches in NFL history, and he attributes this success to a simple dedication to process. In fact, he has published a book called, “Earn the Right to Win: How Success in Any Field Starts with Superior Preparation.” His approach to football is driven by rigorous data and painstaking preparation. Of course, he wants to win, but his goal—that which IS achievable—is to be better prepared than the other team.

As Louis Pasteur said, “Fortune favours the prepared mind.” Investors cannot predict what the market is going to do (i.e. the outcome). What we have full control over, however, is our preparation for participating in that market—our personal investment plan. The importance of this plan, and the mindset of the serious investor, is analogous to that of an elite athlete.

Dr. Todd Lougheed is a sport psychologist at the University of Windsor who is involved with Canadian Olympians. The key to their success? Focus on process, not outcomes. He says that worrying about performance is actually detrimental to performance. You must have confidence in your ability to perform, then execute that which has been practiced and rehearsed.

One common technique used by elite athletes is visualization. This does not mean picturing oneself on the podium, but rather how to perform well in a variety of circumstances—including challenging ones. If you can plan the most effective strategy to deal with problems, those same problems will become more manageable and easier to recover from when they occur.

Perhaps the single most important thing an investor can do is to develop their own investment plan, based on sound principles, and then engage in a “stress test.” What if the market drops 50% (or more)—would you be able to hold on (or buy more) when everyone seems to be selling? What if it goes up by 50%--will you sell to rebalance when everyone else is buying? For this is the path to superior returns. It is about the process of investing.

Like the coach of a pro sports team or an elite athlete, one can prepare as diligently and intelligently as possible to increase the chances of success, but the end result is never guaranteed. There are just too many other factors involved.

Process, on the other hand, is what that same coach or athlete does before and during the game in order to optimize his or her chances of success. The paradox, of course, is that focusing on outcome rather than execution makes success less likely.

Focusing on investment process, not outcome, should be our goal. The market will go up and down. Winners will become losers and losers will become winners. These things are unpredictable and uncontrollable. Over the long term, it is the calm execution of well-laid plans that will deliver superior performance.

“Incredible change happens in your life when you decide to take control of what you do have power over instead of craving control over what you don’t.” – Steve Maraboli.

Matt Poyner is a DIY investor and participant in the Oshawa Shareclub. Reach him at matt.poyner@gmail.com