Investing Without a Process is Nothing More Than Randomness – A Recipe for Disaster

When you don’t have an investment process, you can only focus on the outcomes, which are almost purely random. You learn nothing from outcomes. With an effective investment process, you know what stocks to buy, when to buy, and when to sell – and there’s nothing random about the outcome. 

Throughout my 25 years in investment management, I’ve made hundreds of decisions – some good and some bad. For many of those years, all I could do is focus on the outcome because I didn’t really have a process for making decisions. But, as I learned with my Netflix experience (see – Netflix, The Best and Worst Investment I Ever Made), there’s no way to control the outcome if you don’t have a process. An outcome is what it is – either good or bad, but there’s no learning from it. There’s no predictive power in it.

Unfortunately, that’s how many investors go about making their investment decisions, relying more on instinct, randomness, or the recommendations of others rather than a lab-tested, repeatable process. The outcome is much easier to observe, while a process is much more complex. But, without it, there no way to determine what to buy, when to buy, and when to sell without the burden of self-doubt. And that can be a death knell for investors. Many of my clients have come to me carrying a basket of stocks without a clue as to why they own them. That’s no way to go through life, especially with your financial future at stake.

Random Outcomes vs. Process – I Choose Process

Following my Netflix fiasco in which I left millions of dollars on the table, I knew I needed a process and a framework to guide the process. All the great investors have a process and, except for some universal investment principles most of them follow, probably no two are the same. While I can’t necessarily say I built a better mousetrap, I can say we do have a mousetrap, and it’s getting better all the time. That’s what having an effective process does. Everything you do – every decision you make becomes quantifiable and measurable, which is the key to avoiding mistakes and refining your craft over time.

I also can’t say I built our process on my own. As a portfolio manager, I bring a particular set of skills to the job. I have the lay of the land, and I bring ideas to the table. As a strategist, I look for better opportunities to get us from here to there, but I have neither the temperament nor the expertise to design and build the bridge that gets us there. I needed someone with engineering smarts to build the bridge. In investment parlance, I needed a financial analyst.

The Indispensable Role of a Financial Analyst

A top tier financial analyst brings a unique set of expertise and skills to the table. With my vision, convictions, insights, I provide the framework. But, it is someone with an insatiable appetite for research and a penchant for details who can build out the process to validate or disprove my ideas. Equally important, a good financial analyst provides the capacity to monitor our investments continuously and conduct the ongoing research necessary to determine whether they still meet our criteria. If I had such a person and a process six years ago, we might still be holding Netflix.

I count myself very fortunate to have found that top tier analyst in Frank Corbett, a 25-year veteran of the investment arena – a decade with Charles Schwab, a decade with a private investment firm, and now five years with Touchstone Capital – who unabashedly loves what he does. He not only brings his specialized expertise and skills to the firm, but he also brings extra energy to the process. While I can spot a great building from 10,000 feet, Frank can get inside the building to see if it’s as great on the inside as it is on the outside. After spending hours and hours in research – listening to conference calls, reading 10k reports, etc. – he’s able to bring it all into focus with his analytical abilities to provide the precise insights we need to make the right decision.

Lesson Learned: In Investing – Focus Only on What You Know and Control

As I wrote in my last blog post, Netflix was both my best and worst investment. But it was also my most significant learning experience. I’ve always known that we can’t control the movement of the markets. But I realized then that making stock investments without a process is mere randomness, and the only way to judge my investment decisions was by the outcome, which I can’t control. I know now that, by relying solely on signals caused by randomness, we learn all the wrong lessons. With Frank and a process that’s continually being refined, we know we can achieve positive outcomes because we have complete control over the process.

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