Well, that was a busy week, wasn’t it?

The non-Taper, the Lehman anniversary, oh, and our little launch has kept your humble author rather busy. Since its Friday, the day I like to get all philosophical on y’all, let’s reflect on a simple issue: What is more important to investors, their process or their results?

Given the amount of emphasis The Street puts on results, it is no surprise that Outcome dominates.


“The reason investors and the investment industry rely on performance is because it’s simple, objective and easy to measure. But more importantly, performance goals, performance reviews and performance measurement are so common in business, in sports, in education, in investing—almost everywhere—that not using them feels uncomfortable.”

-Marshall Jaffe, Think Advisor

In broad strokes, what Jaffe is suggesting is dead on. However, I suspect there are more nuanced wrinkles involved.

Wall Street appears to be selling outcome, but thats illusory. What they are really selling is potential results. They are luring investors in by selling the possibility of out-performance, and not the actual out-performance itself. After all, how many managers receive the wildly misnamed “incentive fees” even when they under-perform? The incentive, to be blunt, is to bill 2&20 on as many assets as possible. This is not the sort of fee outcome most investors really thought they were signing up for.

Then there is meta-performance — why do you imagine you have the skills to pick the managers who will out-perform? Experience teaches us that most don’t; those fund of fees that charge an additional fee on top of fees not only can’t pick managers that consistently out-perform, their additional fees make the task nearly impossible.

When you consider the alternative — evaluating process — most investors (including many pros) simply lack the skill set to proceed. It has a degree of subjectivity; it relies on statistical analysis that is often counter-intuitive. And perhaps most difficult of all, it requires the abdication of traditional investing myths.  To quote Jaffe,  “Process is a much better predictive tool in the search for future success—and the most successful people in their fields focus on it and only it.”

Process focused investors shift the usual thought process. They create a different perspective from the usual analytical framework. I have yet to see anyone make good investment decisions based on evaluating queries Sharpe ratios and biggest draw downs, but that has not stopped a cottage industry of consultants from relying heavily on those and related mostly useless questions.

Its not just that “Past performance is no guarantee of future results.” Its that it is an actively misleading goal, a dangle of which you have precisely zero ability to evaluate.

Hence, the best practice for both individual and institutional investors is to focus on the investment process, and not the outcome.

Category: Investing, Markets, Philosophy

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

10 Responses to “Outcome or Process Oriented?”

  1. LongTerm says:

    Good stuff — thanks!

  2. krice2001 says:

    I guess it’s a little bit of both, Barry (outcome and process). As a customer, I appreciate your dedication to “unbiased” and non fad oriented process. In fact I like that. But let’s face it, if I used an IA who was dedicated to their process but results were continually underperforming over many years, then while I would appreciate the discipline, I would probably start to look at my alternatives.

    • SkepticalOx says:

      @krice2001 I think that’s a given, but more so on the long-term results from the specific process.

      My question to BR though, would be: how does an individual investor determine a fund manager’s investment process, especially without being able to sit in their day to day meetings and standing over their shoulder to see if they are sticking to their process or not? Is there a good way to do this, especially when you’re on the lookout for a new manager?

  3. sellstop says:

    Markets constantly change yet some things never change. Cute. But true. The process must take advantage of these two truths. Somehow. As far as process goes the underlying truth is that “if you trade well the profits will take care of themselves”. I don’t know how one recognizes this in another unless one can already be profitable on their own. So it comes down to salesmanship, and a look at the past results.


  4. tsavage9 says:

    Pedigree + Process = Performance

  5. trailhead says:

    A) Focusing on performance means constantly comparing yourself to others, which is an endless sort of creepy vanity.

    B) Focusing on process means accepting that life has its ups & downs, and leaves you with energy for love, and learning.

    Option B) is the healthier one.

  6. CD Sorensen says:

    “No plan of operations extends with any certainty beyond the first contact with the main hostile force.”

    I’m not sure whether I would say the main hostile force needs to be any one thing in investing, because it fits from more than one relationship – advisor to client, client to market, advisor to market, advisor to firm, client to firm, firm to market, and on and on.

    When we talk about results, do we mean beating an index? Do we mean providing for needs? Do we mean providing for desires? Results are based on an initial perspective.

    When we talk about process, do we mean analytical method? Do we believe there is more than one “right” analytical method? Do we define “right” by results? An evaluation of process is related to the attempt at subjective results; what level of effectiveness (related to yet another goal: finding good processes to find results) can be promised by an evaluation of only process?

    I would also argue that without a goal, there is no need for process, and a goal provides the importance of an analysis of process, so to say evaluating process without ANY eye to results could be abused as a contrarian selling tool.

    And what hope do we have of evaluating a past process, in the same vein that we have of evaluating past results? I’m not arguing to give up, but I think its important to balance that thought because it can certainly feel just as good finding a good process as it does receiving a good result, and ultimately aren’t the feelings the things that can lead us astray?

  7. [...] The best investors are process oriented not outcome oriented.  (Big Picture) [...]

  8. cowboyinthejungle says:

    Outcome is easier to understand, so it becomes the default preference for analysis. A great recent blog article discusses this concept in the context of my field of work: http://www.johnskylar.com/post/61507282912/why-you-dont-fucking-love-science

    We are often indifferent to process and idolators of outcome. And yet, the very opposite is true in some aspects of our culture…a topic I’ve found myself thinking about a lot lately. Examples of how we’ve become fascinated with processes over content abound…financial transactions take priority over the assets underlying those transactions; government policy discussions take a back seat to discussions of the political ramifications of said policies; the circus of being famous trumps the work warranting fame; techno/device fascination takes precedence over real-world utility, etc., etc.

  9. denim says:

    Barry seems to name process and outcome as separates. As a systems type, I see FA’s as investment systems designers. As such, systems have inputs, process functions, and outputs. Sort of like inputs= financial data of all sorts, functions=analysis using known and mysterious models, outputs=outcomes, you know, like money you can spend on yourself.