Our elders always drive into us two philosophies which they opine to be of paramount importance in both their lives and our lives. Firstly, they stress on the importance of doing the right things without focussing on the results of our actions. Secondly, they always remind us that going down the right path sometimes produces deferred results rather than instant results.
These philosophies ring true in the world of investing as well. The best way to focus on doing the right things in the investing world is to have a sound investing process.
Having a sound investing process, which is nothing but having a clear cut set of decision making rules and criteria for all our investment decisions, helps us think our decisions through more holistically which leads to better decision making.
Now, there is no process which is expressly defined as a sound investing process. But, basing our investment decisions solely on things such as stock tips given by so called experts, friends and family, buying into stocks based on gut feelings, buying stocks just because marquee investors have bought them, without following through on them with due research and diligence can definitely be defined as a flawed process.
Beyond that, everyone of us has our own distinct process, our own decision making rules and criteria which we follow. Sticking to our chosen process and evolving it over time is what matters in the long run. There are a lot of times, where we will see others around us make a lot more money in the markets with no work and a flawed process, than we do with hard work and a robust process.
The role of luck in investing can never be fully negated. There will be times when the rub of the green goes our way with a flawed process and other times when we get dealt a rough hand with a robust process. What is important is for us to be honest to ourselves and admit to the flaws in our process, and to the fact that we may have been lucky, and to try and evolve our process by mitigating the errors. Also, never get disheartened on the back of disappointing results arising from a robust process.
Riding on luck is never an option, because in the long run, nothing is gained from luck and everything is gained from work, because beyond a point, even our luck, has to work. It is therefore important to keep evolving our process to try and mitigate the role played by luck in our investment operations.
The biggest opportunities to evolve our process come from our greatest mistakes. Making mistakes is inevitable over the course of a lifetime as an investor. What is important is to not have an ego, accept our mistakes, and learn from them. One off mistakes are common and inevitable. It is only when our mistakes begin to exhibit a recurring pattern that we really need to worry.
The best way to correct our mistakes is to look objectively at them, identify the root cause of each of the mistakes, and address the root causes of each of the mistakes. Doing that will improve our process in the sense that, once a mistake has been identified and corrected, there is a good chance that we won’t make the same mistake again.
For example, if you keep losing money investing in companies which fall into trouble owing to the inability to pay off their debts, it means that you are making the mistake of investing in fundamentally weak companies, which are laden with debt, which is the root cause of the negative results being produced by your process. The lesson to be learnt from investing in such companies, is to remember to thoroughly research the fundamentals of companies going forward and to avoid investing in debt laden companies.
It is important to keep in mind that a robust, well thought out process is way better than a flawed process. Also it is important to remember not to keep changing processes just because they are not producing the required results in the short term. A robust and well thought out process will undoubtedly produce superior returns in the long term. Most importantly, no process, no matter how well thought out and robust is perfect.
Evolution is a recurring phenomenon, as are mistakes. The pain from the mistakes and flaws of our process, should be the fuel that drives our learning and evolutionary journey which will ultimately result in us becoming better investors armed with better processes, leading to better results and returns from the stock markets.