Investors Should Be More like Athletes

In the past few months Indian small and mid-cap companies have corrected significantly. This prompts the investors to do customary navel gazing and change their investment processes and strategies. This articles reminds us what is the right thing to do at this time.

Seth Klarman reminds us that athletes have routines. They have routines within routines. From practices to pre-game to game time to post-game, athletes have a process for everything. It is  habitual, muscle memory stuff for the body and mind. It’s repetition at its finest. It’s done for one simple reason: it helps with intense focus on the task at hand because it’s one of the few things athletes can control. Good outcomes are the product of a sound process repeated often. But good outcomes are not always guaranteed.

Klarman explains why investors should be more like athletes, with the help of James Montier: It is critical that you remind yourself, that you can only control your process and approach. That you cannot forecast the vagaries of the market, which in any case, are an opportunity and not a problem for value investors. And then you should invest, comfortable that you’re doing the right thing, and confident that when the dust settles and the crisis passes, your steadfastness of discipline will have added more value than any other approach. The way to maximize outcome is to concentrate on process.

Montier points out that psychologists have long been aware of a phenomenon known as outcome bias. This is the tendency to judge a decision differently based on its outcome. For example, if a doctor performs an operation and the patient survives, the decision is rated as significantly better than if the same operation fails and the patient dies. According to Montier, during periods of poor performance, the pressure builds to change your process. But so long as the process is sound, this will be exactly the wrong thing to do. It’s so easy for one’s investment process to break down. It is crucial to have a sound process that will enable you to perform this difficult task with intellectual honesty, rigor, creativity, and integrity.

The best thing any of us can do is focus on things that are highly likely to produce good results. It may not lead to the desired outcome of phenomenal returns every single year but it does lead to gradual improvement and progress. The risk is in how people react to a bad outcome. That’s the point where people get themselves into trouble. Was the process the problem or was it just a bad result? Not being able to separate the two leads to poor decisions and mistakes. Yet, many investors consistently change their strategy when their portfolio returns don’t live up to their expectations or due to relative performance envy. No matter how hard an investor tries they’ll never control the outcome — the returns. A sound process will never eliminate bad outcomes entirely. It can lower the chance of bad outcomes happening. So that, over time, a sound process will produce more good outcomes than bad.