I’ve been doing a lot of swimming lately, including a number of open water competitions such as the Midmar Mile.
The training was initially easy, probably because I didn’t know what I was getting into.
Then it got really hard when I actually started competing. I would kick off too fast, struggle to keep my stroke going, breathe poorly, and before long I’d begin to flounder, eventually finishing (but not comfortably).
Then, suddenly, at my last competition I knocked almost 25% off my mile time and it was a total breeze. What happened? I was focusing on the process, not the outcome.
I was no longer swimming to beat a time or the person in front of me.
I was swimming to swim well. I was focusing on my stroke, my breathing and sighting the next buoy. Before I knew it, I was past the last buoy and onto the last 200m in a smashing new time.
Trading and investing work in exactly the same way. You can’t control the outcome, but you can control the process.
And if you have a solid process to focus on, more often than not you’ll get the desired positive outcome.
So, what is your process? How do you filter stocks that you might want to buy? How do you research those stocks and come to a decision to either buy, move on or add it to a watch list?
If you do buy, then what? How do you decide to exit the stock? What’s your review process for stocks in your portfolio and on the watch list? How do you review your process?
The point of having a solid process is about more than just focusing on what you can control. It also provides you with a structure you can utilise repeatedly.
So, if you have a set process that is finding more winners than losers, you know you can replicate it. If your process is random, you’ll won’t have this ability to replicate, and any winners you do find might as well simply be down to luck.
Now sure, sometimes something will come at you from left field, like fraud, Trump tweets, or just poor analysis on your part.
But even when this happens, you’ll be able to revisit your process and see if it’s possible to tighten it to prevent it from happening again or it can help you determine whether it’s just a natural part of the risk of investing.
The problem, of course, is that the process you decide on could be anything. You could use Graham and Dobbs’ classic value investing, or you could go for growth stocks at reasonable prices as per Buffett and Fisher.
You might decide that dividends are hugely important, or rather focus on cash flows or debt. The problem is that you can become overwhelmed by all the options while you try and find that ‘perfect’ process. But there isn’t a perfect process – just aim for one that is robust.
I’ll also add that ‘simple’ nearly always wins the day. As humans, we’re trained to believe that complexity is always better but, in truth, it seldom is.
A simple process with a few rules will generally keep you safe from horrific stocks and will give you a decent chance of catching a few real winners.
Then, another very important point: While a ten-bagger is great, there is no chance that every stock will be one.
They’ll come along every so often and boost your portfolio size, but what you need to do in-between the ten-baggers is keep afloat and not lose all your money or your enthusiasm.
And, lastly: When you are reviewing your process, make sure you also take a look at your adherence to that process, not just the results it achieves.
In other words, do you have a strong process, and do you stick to it? If you can answer yes to both, you’ll make money over time.