As you might imagine, we at Cedarstone Advisors spend a great deal of time researching and discussing how to make good investment decisions. The decisions we make have the potential to significantly impact the lives of our clients, and at the end of the day, our clients pay us to make good decisions on their behalf. We believe that making good decisions is about process. It is about research, discipline, hard work, and consistency. In other words, ‘how’ we make decisions is every bit as important as the decision itself. In fact, we believe that ‘how’ we make a decision is more important than the outcome of the decision itself. That isn’t an excuse. In fact, this past year we had an amazing outcome, significantly outpacing our benchmarks, yet we are not focused merely on the outcome, we are focused on the process that got us there.
Consider for a moment the matrix below that juxtaposes process and outcome. Consider decisions that you have made in the past, not just investment decisions, but important life decisions. How was your process, good or bad? How was the outcome, good or bad? Have you experienced times when you worked hard to make a good decision and it paid off? What about the opposite? Which of the four boxes would you prefer? Most of us choose “Good Process and Good Outcome” box all the time, but what if that were not possible?
I am always surprised by the number of people that choose ‘Bad Process and Good Outcome”. I suppose that many people simply want the good result. Yet, I have seen the chaos that results from having a bad process, from having poor rationale, logic, discipline, and research. In the investment world, I have seen investors (even professional advisors) make investment decisions on random articles from a website or magazine with little investment research and little understanding of the investment itself. Ironically, some of those decisions did actually have good outcomes. It is possible to have terrible processes but have good results at times.
Yet, the issue is that investing is not just about a single decision. Investing is comprised of hundreds of small decisions across a portfolio and across time that makes up the ultimate result. When the decision must be repeated the importance of process begins to matter. Yes, those with bad processes may get lucky on an investment or get lucky over a period of a year or two. Yes, those with good processes will sometimes have bad outcomes. Yet, I believe it is those with a good process that will win over time.