Process Versus Outcomes in Investing

by | Feb 10, 2018 | Systematic Trading

Outcomes. When you are a long-only investor and the markets behave like they did in 2017 it is easy to focus on outcomes and tend to allow your mind to diminish the importance of process. When your equity chart increases every month for twelve months straight you have full confidence in your process because the outcomes are so darn favorable.

Then February 2018 hits you. The outcomes that your brain has become accustomed to change dramatically and your focus switches to process. Every day the financial media reminds you that volatility has returned with a vengeance like you haven’t experienced in so long that you forgot what it feels like. This is very unpleasant. Gut-wrenching even. Suddenly there is a voice in your mind screaming that there must be something wildly amiss with your process.

Process. It is far more important than outcome and it is what we, as investors, should be focusing on but why would we when we produced positive returns every single month in 2017. Our investing process must have been sound given how smooth and upward sloping our equity curve was last year.

Doubts. If you have them about your process there is nothing quite like a spike in volatility and a swift drawdown to make you question whether your investing strategy is in dire need of an update. New rules perhaps. Tighter stop losses would have worked so well this month. Buying cheaply priced puts in January now seems like such an obvious move that you should have made.

Relax. If you have a sound strategy that has proven itself over time then now should be no different and you must ignore the alarms from the financial media and relax. Now is not a time to jump ship and abandon your strategy. Surely you have read about the gains you would have enjoyed had you bought stocks in Berkshire Hathaway and Apple decades ago and just held. I suspect you also understand that you would have had to endure many drawdowns in excess of 40% between then and now. What we are experiencing lately is child’s play compared to those drawdowns.

My advice is to stay the course (assuming that your course is a systematic investing strategy that suits you and will provide you with returns and drawdowns that are acceptable), don’t pay attention to the alarmist headlines in the media, and if you are in the accumulation phase of your investing plan continue to contribute each month.