Signs of a Good Investment Process, Revisited
Signs of a Good Investment Process, Revisited
A good process is critical to any successful long-term investing approach.
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An investment process is the implementation of an investment philosophy. It deals with how new ideas are found, researched, implemented, monitored, and managed in an investment portfolio.
In July 2014, I wrote a post outlining the six signs of a good investing process. They are:
Stoic: It can endure both good and bad short-term outcomes without getting emotionally swayed in either direction.
Consistent: It doesn't adjust to current market sentiment and sticks to core competencies.
Self-critical: The process is periodically reviewed, includes both pre-mortem and post-mortem analysis on decisions, and is refined as needed.
Business-focused: Rather than rely on heuristics like "only buy stocks with P/Es below 15," a good investment process focuses on understanding things like the underlying business's competitive advantages (if any) and determining whether or not management has integrity and if they are good capital allocators.
Repeatable: A process gets more valuable with each application -- insights are gained, deficiencies are noticed, etc.
Simple: The less complex, the better. If you can hand off your process to another investor without creating significant confusion, you're on the right track.
Ten years on, these still hold up, though I've come to appreciate the challenges of each attribute more fully.
And I'll add one more to the list:
Pliant: A good process should have solid roots but flexible branches.
As I look out of my office window, I see a row of 40-foot Eastern hemlock trees that illustrate this point nicely. The branches and tops bend with the wind, but the foundations stay firm.
Because markets are complex adaptive systems, we must be willing to adjust our processes without compromising what we consider foundational. For me, that’s analyzing moat, management, and price, but I am open to considering new angles such as stakeholder and sustainability analysis to better understand those foundational principles.
Over a long enough timeframe, every process will face an existential crisis. It could be due to prolonged underperformance or a single stock blowing up, but the tenets of the process will be challenged and doubted.
When that happens, you either reaffirm your approach and rebuild upon it or become untethered. As such, it’s preferable to base it on timeless principles.
An established process is also helpful in separating bad luck from a bad decision. I don't kick myself over underperforming investments that were made consistent with my process, but I do regret the investments that departed from my process in one way or another.
The best lesson to take from those mistakes is simple: stick to the process.
Stay patient, stay focused.
Todd
Some additional resources:
At the time of publication, Todd and/or his family did not own shares of any company mentioned.
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excellent addition, there is a reason that hybrids are the strongest plants in nature.