Mathieu Martin |

Don’t Be Result Oriented

Let’s start with a question: You invested in a publicly traded company and achieved a 100% return in just a few months. Was it a good investment decision?

If you think the answer is unequivocally yes, keep on reading.

I’ll come back to this question later, but let’s continue with a parallel between investing and poker. Imagine you’re playing a game of Texas Hold’em and you are dealt a pair of aces, the best possible starting hand. After raises and reraises before the flop, you find yourself “all-in”, meaning you have bet all your chips. Your opponent reveals a pair of queens, a hand you have an 81% probability of winning against. However, luck is not on your side that day, and the flop reveals a third queen for your opponent. You end up losing all your chips and are eliminated from the game.

Did you play poorly?

If this situation happened again, would you still like to bet all your chips in a situation where you are more than an 81% favorite? If you ask me, the answer is always yes. I’m ready to take this bet all day!

Sometimes good decisions end with a bad result, and vice versa. The results don’t always reveal the quality of the initial decision.

Let’s come back to our original question. Does a stock that returned 100% in a few months necessarily mean your decision to invest was a good one? Suppose the initial probabilities were that you would lose everything 99% of the time, and double your investment only 1% of the time. Would you have taken this bet?

If you did and had been lucky to double your money, it would still have been a bad decision, but with a favorable result this time.


Don’t Be Result Oriented, Be Process Oriented

“What makes a decision great is not that it has a great outcome. A great decision is the result of a good process […]”

― Annie Duke, Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts

Here is the best advice I can give you: forget about the result. Just stop thinking about it; it’s not important. Instead, focus on the process that leads you to a decision. Improving your decision-making process will lead you to better investment results.

Here are some ideas to help you become more process oriented:

  • Think in terms of probabilities. What is the probability of the company getting a new contract, losing a large customer, increasing its profit margins, etc.? If, after an analysis of the different possible scenarios, you believe the odds are in your favor, take the bet. Otherwise, be disciplined and move on to another opportunity.
  • Speak with other investors. Understand the decision-making process of successful investors and the key elements they analyze. If you manage to replicate their process, your results will come closer to theirs.
  • Learn continuously. Whether it’s financial theory or industry-specific concepts, this knowledge will help you become better and smarter when you analyze companies.
  • Do proper research before investing. If one of your stocks is hit by a risk you did not see coming, ask yourself if there was a flaw in your research process. Sometimes, risks are simply unpredictable. Other times, they were predictable, but your research was sloppy.

Another idea to improve your decision-making process is to use a decision journal. ‘’A good decision is known before the outcome’’, notes Farnam Street[1]. ‘’Good decisions are valuable but they are more valuable if they are part of a good decision process because a good process allows for feedback about where you can improve.’’


Learning from your mistakes is good, but…

It’s totally appropriate to learn from one’s mistakes, as long as the mistakes are real. If you draw conclusions based on results alone, you may end up learning the wrong lessons from time to time. Remember the poker example at the beginning; would it make sense to no longer play your pair of aces for fear of losing everything again, although the odds are overwhelmingly in your favor?

The biggest risk is to draw a wrong lesson, and then apply this new lesson (or rather, this new mistake) to your future decisions. As Lawrence Creatura discusses in his excellent book Long and Short: Confessions of a Portfolio Manager, ‘’be very careful about what you learn from your losses. There are lessons to be learned in the investing graveyard, but there are some risks taken that — given similar circumstances — you should probably take again.’’

After a bad investing outcome, find out what (if any) was the weak link in the process that led you to the decision in the first place. Work and refine that process.

Pay so much attention to it that you’ll even forget about the result.


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[1] Why Bad Things Happen to Good Decisions,