The outcome of a probabilistic activity like investing can be either good or bad, especially when considered from a relative short-term perspective. Many studies researching sport, business and investing activities indicated that a good, consistent process is the key differentiator between favourable and less favourable outcomes over time. Alternatively, it is more likely that sport teams, businesses and investors following sound, consistent, systematic processes and practices will experience more successes than failures over time. However, as individuals we tend to focus solely on specific outcomes, as if such outcomes can be fully controlled in competitive environments (i.e. the role of luck or good fortunes is ignored in the outcome), or that one outcome is the final judicator of a particular strategy, i.e. in another period in time the fortunes may actually reverse for the better or worse.
Successful long-term investors tend to have some traits or skills in common. For example, a passion to learn more about their investment (or unless they have a good idea and understanding about their investment they will not easily commit to it), a willingness to take some risk but understand the odds of different outcomes), patience to wait for their strategy to come to fruition and perhaps very importantly, a clear distinguishing in their minds between investment and speculation. Such investors know that the passage of time will turn the odds in their favour, unlike gambling that for the great majority of participants will be a negative sum game over time.
Moreover successful investors focus on the investment process they follow and understand that investment outcomes over the short term may be very misleading and even unjustifiably reward some lucky investors or penalise the more prudent investors. For example, it is quite possible that two investors – one skilled and following a systematic process while the other is blindly following some “hot tips” from friends – achieved similar results over a certain period. However, one would find that the more skilful investor will outperform the less skilled (no-process) investor over more investment periods and thus the longer term.
Thus it may be worthwhile for any investor to acquire knowledge how to develop a good investment process, or when the investor is outsourcing the investment decision to a professional investor (fund manager) at least has some idea what a good investment process should entail. Let us review the basic elements of a good investment process and I quote from the excellent research that Michael Mauboussin (2010), Chief Investment Strategist at Legg Mason Capital Management, and one of the world’s leading experts in Behavioural Finance, did on the subject over the years: