Outcome or process — what investment focus succeeds over time?
Barry Ritholtz,
Washington Post, February 23 2014




“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


Has this ever happened to you?

In the course of a conversation, you learn about an acquaintance or colleague who made an unusually successful investment. For whatever reason, they put capital at risk into XYZ and the returns were extraordinary — far more than what is typical for your investment returns.

In that situation, which of the following comes closest to your immediate thoughts?

(1) I wish my 401(k) was filled with XYZ !

(2) If only I had his access to his inside information.

(3) How much time and effort goes into his research?

(4) What does his win/loss ratio look like? Gains vs. losses over time?

(5) Sounds like he got really lucky.

If your thoughts were along the lines of answers 1 or 2, you are, like most investors, outcome-focused. If your thoughts were along the lines of answers 3 or 4, you are in the minority, and are process-focused. Answer 5 can fall into both camps, but the significance of each depends on the context.

Let’s define these two so you have a better sense of what is under discussion.

Outcome is simply the final score: Who won the game; what numbers came up in a roll of the dice; how high did a stock go. Outcome is the result, regardless of the method used to achieve it. It is not controllable. You can blow on the dice all you want, but whether they come up “seven” is still a function of random luck.

Process, on the other hand, is a specific methodology. It is a repeatable approach to any challenge or endeavor, be it construction or medicine or investing. And you can control a process.

What kind of people are outcome-oriented? Gamblers, many (but not all) sports fans and, of course, speculators.

What about the process-oriented people? They include airline pilots, professional sports coaches and, of course, long-term investors.

I have never recommended a sports book in these pages – how relevant are they for investors? – but I am going to do so now: New York Giants Coach Tom Coughlin’s book “Earn the Right to Win: How Success in Any Field Starts with Superior Preparation.” Coughlin is a master of process. His approach to football is rigorous and data-driven. His players enter each game better prepared than the opposing team. Imagine what a huge psychological advantage it is, knowing you know much more about your opponents than they do about you.

For example, the annual NFL Scouting Combine is a week-long showcase for head coaches and assistants to look over this year’s draft prospects. Clipboards in hand, they prowl events evaluating more than 300 players.

Before he joined the Giants, Coughlin was fired after nine seasons with the Jacksonville Jaguars. That small inconvenience did not keep him from pursuing his process, going to the combine, evaluating draft prospects.

Why would a head coach without a team go to combines to evaluate players? Coughlin did not want to be at a disadvantage if he was hired again. Not coincidentally, that was where he bumped into the Giants’ general manager, who was astounded by his work ethic and his commitment to process. “You don’t have a team, what are you doing here?” he was asked.

His response: “I will one day, and when I do I want to be ready.”

Not too much later, the Giants hired him, and Coughlin has since become one of the winningest coaches in NFL history. Indeed, the Jaguars’ decision to let him go has been described as one of the 10 worst head coach firings of all time.

According to Coughlin, this was simply the result of dedication to process.

While two-time Super Bowl-winning coaches are process-oriented, Wall Street thrives by appealing to our tendency to be outcome-focused. We rank fund managers, best asset classes, top-performing sectors, highest-returning mutual funds. Note that all of these are ranked not by repeatable process, but by outcome. This is a brilliant bait-and-switch. You don’t know if these outcomes were the result of dumb luck or one-time events or simply a turn of the cycle. The tease is that you, too, can have these fabulous returns if only you invest in these products. Here is the next XYZ, yours for the taking.

If only. A funny thing happens the next year: A whole different set of outcomes “wins.” Different sectors lead, another mutual fund is on top, a new manager is top dog. Last year’s top performers? That was last year! Here are the new winners, ripe for your investment dollars. Wall Street engages in this classic outcome-oriented advertising because it pushes people’s buttons. It sells.

It is not just that “past performance is no guarantee of future results.” But rather, that is an actively misleading goal, the legalese in fine print belied by the headline promise of great riches. I call that “the dangle.” It is the tease that suckers investors in. Any Wall Street advertising that does not go into the boring details of methodology is most likely to be pushing past performance.

Which brings us back to our earlier questions: If you said of your colleague who made all that money, “sounds like he got really lucky,” you are probably on to something. (To the outcome-oriented investor, it may just be sour grapes.) But the process-oriented investor knows that dumb luck is not a repeatable event. It is not anything that can be relied on over time. Indeed, eventually, random outcomes all revert to the mean, meaning that streaks eventually end. Understanding this is a key part of intelligent and rational investing.

Process-oriented investing is a long-term approach to putting capital at risk by owning a broad variety of asset classes, making periodic contributions and regularly rebalancing. You can just hear the marketing guys screaming, “Boring! How can we ever sex up that sort of approach?!”

Focusing on your investment process, and not the outcome, should be your goal. Here is the payoff: Over the long term, a good process delivers highly desirable results, and generates better and more reliable outcomes. There is nothing boring about that.


Ritholtz is chief investment officer of Ritholtz Wealth Management. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. Twitter: @Ritholtz.

Category: Apprenticed Investor, Psychology

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.

8 Responses to “What Is Your Focus: Outcome or Process?”

  1. wealthresources says:

    Big fan of the Coaching metaphor. Thanks for illuminating a great example like Coughlin. Process is where it is at. If its not statistically proven as sustainable and repeatable count me out.

    On this topic. I happened upon an article that is now almost three years old in which you discussed the manager firing process for Fairholme (FAIRX) and that you hired SDY. Good example, right there.

    As a Dimensional Advisor, my firm relies on academically defined process for higher expected returns – that are generously generated by outcome driven investors.

  2. Aaron says:

    Hi Barry, loved this article! As a long time reader of your blog, I have come to focus more on my process of investing as opposed to solely guessing where my investments should be to reach a certain return. Here’s a question for you, though: when do you know have a “good” process in place (i.e., data driven based on probabilities) versus a “bad” process, irrespective of the outcome/return? Looking forward to your reply, and hope you have a great weekend!

  3. sdpost5 says:

    The coaching example is a good one. Growing up in North Carolina as a basketball I noted a lot of examples of teams firing coaches for the wrong reasons. They are too impatient for the results, and they fire a coach with good processes that simply take torturous amounts of time to pay off.

    Dean Smith was an ingenious hire for UNC, the ultimate data driven strategist — and he was completely unproven when they brought him in. In his post-game comments, he would often talk a different language than the reporters; that exciting shot that was a turning point in a game might also have been a LOW PERCENTAGE shot, so to him a terrible shot. And so that player might well be benched for the next game. Your emotions might say to give him more PT; but the system and the cool head says to bench him.

    Vince Lombardi was a good study in process; I read Jerry Kramer’s book (Instant Replay) and Lombardi would have been a prepared (and utterly ruthless) trader if he’d gone that route. Benchmarks are basically ready-made excuses — either for success or for failure, and Lombardi had no room for excuses. When you watch Urban Meyer, you can see how brilliant his offense is; but he’s so rigorous that it affects his health. He’s got the red face of the guy in the trading pit who’s been yelling all day.

    So perhaps a guy like John Wooden or Phil Jackson (back to basketball) is a better example as they succeeded without — like say a Bobby Knight — facilitating quite so many nervous breakdowns, either theirs or their players’. Fierce competitors, but they emphasize the importance of flowing mindfully as one team, and of continually improving in a balanced way. (So, i.e. not like that like quote from the Simpsons: “Remember what Vince Lombardi said: if you lose, you’re out of the family!”)

    It seems that you can succeed with or without the cults of adrenaline and extreme criticism. I think a hedge fund like SAC must be so internally competitive that it can’t possibly be fun, and was bound to self-destruct at some point. The business guru Stephen Covey has often said that an internal pressure cooker environment is not sustainable in business — you want to cooperate internally so you can compete with your competition, not with yourself.

    And so the best organizations seem to use what Buffett would call alternative benchmarks. You choose a head coach based on his process, and then you’re patient enough to allow him to succeed. You cooperate with him, rather than putting him in the pietre dish and continuously obsessing about the wins. The Steelers for instance have done more than the Cowboys, and with less money; they are patient enough to allow the process to work.

    Anyway, Ben Graham: “I recall to those of you who are bridge players the emphasis that bridge experts place on playing a hand right rather than on playing it successfully. Because, as you know, if you play it right you are going to make money and if you play it wrong you lose money – in the long run. There is a beautiful little story about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife ‘I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?’ And his wife replied very dourly, ‘If you had played it right you would have lost it.’ ”

  4. pielou says:

    not even Simon Ramo “Extraordinary Tennis for the Ordinary Tennis Player”?

  5. SFGale says:

    To put the issue as a binary question ignores the fundamental inter-relationship of the two.

    Sustainable performance is a product of process.

    Efficacy of process is ultimately ratified by performance.

    Long term performance comes on the installment basis, a day, a week, a year at a time.

    Process without performance is pointless.

    Performance without process is likely ephemeral.

  6. michael2 says:

    This is fascinating because in medicine we take exactly the opposite approach. Most of our quality measures are based on process (e.g. ordering the right tests for a preventive care visit), rather than outcomes (does the patient stay out of the hospital). We actually see focusing on process as a weakness of the measures, because the outcomes are what ultimately matters, but they are harder to measure. The comparison is not 100% since the outcome in finance is so straightforward, but it’s interesting to see how the values are flipped.

  7. rd says:

    Buffet has his latest Berkshire Hathaway letter out. He has several bulleted points on process vs outcome:

    - You don’t need to be an expert in order to achieve satisfactory investment returns. But if you aren’t, you must recognize your limitations and follow a course certain to work reasonably well. Keep things simple and don’t swing for the fences. When promised quick profits, respond with a quick “no.”

    - Focus on the future productivity of the asset you are considering. If you don’t feel comfortable making a rough estimate of the asset’s future earnings, just forget it and move on. No one has the ability to evaluate every investment possibility. But omniscience isn’t necessary; you only need to understand the actions you undertake.

    - If you instead focus on the prospective price change of a contemplated purchase, you are speculating.
    There is nothing improper about that. I know, however, that I am unable to speculate successfully, and I
    am skeptical of those who claim sustained success at doing so. Half of all coin-flippers will win their first
    toss; none of those winners has an expectation of profit if he continues to play the game. And the fact that a given asset has appreciated in the recent past is never a reason to buy it.

    -With my two small investments, I thought only of what the properties would produce and cared not at all about their daily valuations. Games are won by players who focus on the playing field – not by those
    whose eyes are glued to the scoreboard. If you can enjoy Saturdays and Sundays without looking at stock prices, give it a try on weekdays.

    - Forming macro opinions or listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous because it may blur your vision of the facts that are truly important. (When I hear
    TV commentators glibly opine on what the market will do next, I am reminded of Mickey Mantle’s scathing comment: “You don’t know how easy this game is until you get into that broadcasting booth.”)

    - My two purchases were made in 1986 and 1993. What the economy, interest rates, or the stock market might do in the years immediately following – 1987 and 1994 – was of no importance to me in making those investments. I can’t remember what the headlines or pundits were saying at the time. Whatever the chatter, corn would keep growing in Nebraska and students would flock to NYU.

    He also has several discussions on purchases made when markets had crashed and there were lots of distressed assets available. My guess is that he was using local and sector information to understand if there was irrational exuberance or pessimism. He was probably using his “favorite indicator” to help in understanding when big assets (e.g. BNSF, GS) were under-priced as well as the company-specific financials.