The Difference between Process and Outcome
Imagine you are the owner of a cricket team. You are watching 2 players and one of them is Ishan Kishan (Mumbai Indians fame). The other person is not a cricket player (but you do not know or can’t differentiate) but can bullshit a lot about cricket. He comes and hits a six on the first ball whereas Ishan goes for a duck. Who would you bet your money on for the next ball going for a six only? If you are like most, chances are you will bet on that impostor. This is because you will look at the current outcome and decide this guy looks like he knows his stuff. However, like we all come to know later, this is a classic mistake in investing and life – to bet by just looking at the successful outcome.
There is a legendary Wall Street story that mirrors the above theme. A Broker sent letters to 10000 investors. He wrote to half of them (5000) that the markets will go up. He wrote to the other 5000 that the markets will go down. Now this genius was right for 1 group of 5000 people. He now sent similar letters dividing the 5000 people who got the right call into 2500 people each. Voila, he is right twice for 2500 people. He then does it again for the third time with the batch of 2500 and he becomes a god for the 1250 people who had heard his forecasts come right 3 times. Now this is outright fraud, but it is so surprising that many continue to pull off similar stuff even now under the garb of research or access to proprietary stuff or made for special people. This has led to investing becoming a game of outcome/timing/intelligence whereas it is actually a game of patience, discipline and behaviour.
We all have seen many fekus (bullshitters) talk nonsense (yes nonsense). Many of them seem like our friends because they exactly seem to be talking about what is going on in our minds (in this case the minds of most investors). They know that investors crave for certainty and guarantees in an uncertain world. We cannot give guarantees on our own life, but we still look out for guaranteed or certain outcomes even when we know it’s untrue. This human reality has led to the rise of these fekus (which you will find in plenty in every profession and industry).
Have you ever thought that the person who does not know when he is going to pee next will know exactly the behaviour of the markets? Investors generally do not lose money by being in the markets; they lose money while jumping in and out of the markets or waiting to enter. It is once again demonstrated this year that the best (or abnormal) returns come during the worst of times. Most people will do well by just entering the market and then staying put, but the voice of the fekus is so loud and convincing that it takes enormous courage to ignore and invest.
By now you must have realized my viewpoint on investing based on outcomes. We live in an uncertain world that is constantly changing. Thus, investing must be based on a strong process (one that withstood the test of time) and not on outcomes. The process that has withstood the test of time in investing is a goal focused planning driven approach resting on the shoulders of optimism, asset allocation, rebalancing, and great behaviour. The power of the process of financial planning is immense just like the power of checklists and plan is for a pilot during the flight. Does the flight always go according to the plan? It never does and so will your financial plan. It will never go according to the plan and thus course corrections (annual planning sessions) are so invaluable. In fact, most of us do not know exactly what we want (and that is ok). Our goals even change as we age and thus it’s not the certainty of the financial plan that is important; it’s the process of planning together with course corrections that will help you stay on the right path that is paramount. This is the simplest way (yet the most difficult with all the fekus around) that will help you live the life you have imagined with your money and never ever worry about money. Sculptor Elizabeth King said beautifully “Process saves us from the poverty of our intentions”. This is such a powerful one for investors that you ought to read it again and think about it a bit. Rather than worrying about outcomes, focus on the process of financial planning and be consistent with it. This is exactly what a world class surgeon does when she goes into surgery. She is never worried about the outcome of the surgery; she is only focused on doing her best by following the process. The outcome just follows.
The people who obsess with outcomes are the most sub optimal investors. The wise understand the difference between process and outcome and needless to say commit their attention and money in service of the process. Idowu Koyenikan’s quote fits perfectly well here “If you quit on the process, you are quitting on the result“.