October 2023
IN THIS ISSUE
Which is worse?
Swimming with sharks.
Was it a good decision?
Life is full of decisions. And many folks are terrible at determining whether they made good decisions. Consider:
The drunk driver who makes it home safely. Bad decision, good outcome.
The gambler who hits on 20 (bad decision) and gets an Ace to make 21 (good outcome).
The student who plagiarizes but does not get caught.
The promiscuous teenager whose behavior does not result in a pregnancy.
The day trader who gets rich (clearly a bad decision IMHO, though I concede this view is not universally shared).
Bad decision but good outcome. I call these "resulting fails", using Annie Duke’s term “Resulting” which means judging the quality of a decision based on the outcome rather than the process. Although one particular instance of each of these decisions may not result in a fail (bad outcome), the decision making process will eventually produce that bad outcome.
If investment managers can objectively evaluate their decision making processes separately from their investments’ outcomes, then they are far more Likely to find success in this business than those who cannot.
And yet, financial news headlines regularly assign credibility to investors based on the results of a small number of prior investments. It is very common to see headlines like: A Wall Street titan who called the 2008 recession shares 7 top trades to make before the US economy enters into another downturn with stocks 'priced for perfection' and Michael Burry, of Big Short fame, just bet $1.6 billion on a stock market crash | CNN Business.
To be clear, this is a performance business and performance absolutely matters. My point is that not all performance is created equal - performance that follows from a solid decision making process is superior to the same performance that follows from a poor decision making process. Investors should dig deeply into their manager’s decision making processes to determine whether repeating those processes over the long run is Likely result in positive returns - or ruin.
For further reading:
Kevin O’Leary: Bad investment or bad process? (Likelyhoods, Dec 2022) - O’Leary famously invested in the now-bankrupt FTX, and following the crash O’Leary said FTX was a bad investment. I disagree, based on evidence released afterward it is quite clear to me that O’Leary (and many other FTX investors) employed a bad decision making process.
Ben Felix: How to Evaluate Your Investment Decisions - “You cannot evaluate an investment decision based on its outcome. Take a second to let that sink in…” Felix makes the case more persuasively than most commentators I’ve seen.
ONE MORE THING…
Which is worse? Spending $1 million on a doorway, or believing that feng shui could influence their crypto profits? FTX spent $1 million removing one doorway and adding another after a dispute over feng shui, biography says
Swimming with sharks. What can investors learn from swimming with sharks? Recency bias: What it is and why it causes poor investment choices
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