Athletes have routines. They have routines within routines.
From practices to pre-game to game time to post-game, from getting up in the morning, to the meals they eat, to the music they listen to, to getting taped up and dressed, stepping into the batters box (baseball), shooting free throws (basketball), getting into and out of the blocks (track, swimming), or starting their approach (too long to list), athletes have a process for everything.
It’s habitual, muscle memory stuff for the body and mind. It’s repetition at its finest.
It’s done for one simple reason: it helps with intense focus on the task at hand because it’s one of the few things athletes can control.
Good outcomes are the product of a sound process repeated often. But good outcomes are not always guaranteed.
Seth Klarman explains why investors should be more like athletes, with the help of James Montier:
It is critical that you remind your clients, your investment team, and as often as necessary yourself, that you can only control your process and approach. That you cannot forecast the vagaries of the market, which in any case, are an opportunity and not a problem for value investors. And then you should invest, comfortable that you’re doing the right thing, indifferent if you lose your short term oriented clients who don’t and will never understand what you do or how they are their own worst enemies, and confident that when the dust settles and the crisis passes, your steadfastness of discipline will have added more value than any other approach.
This point about controlling your process is absolutely crucial. James Montier … pointed out in a recent piece that when athletes were asked what went through their minds just before competing in the Beijing Olympics, the response again and again was that the competitor was focused on the process, not on the outcome. The way to maximize outcome is to concentrate on process. Montier points out that psychologists have long been aware of a phenomenon known as outcome bias. This is the tendency to judge a decision differently based on its outcome. For example, if a doctor performs an operation and the patient survives, the decision is rated as significantly better than if the same operation fails and the patient dies.
According to Montier, during periods of poor performance, the pressure builds to change your process. But so long as the process is sound, this will be exactly the wrong thing to do. It’s so easy for one’s investment process to break down. When investors worry about what a client will think, rather than what they themselves think, the process is bad. When investors worried about their firms viability, about possible redemptions, about avoiding loss to the exclusion of finding legitimate opportunity, the process will fail. When one’s time orientation becomes absurdly short term, the process is compromised. When tempers flare, when recriminations abound, when second guessing proliferates, the process cannot work properly. When investors worry about the good of the firm, or if publicly traded, it’s share price, rather than the long term best interest of clients, the process is corrupted. Investing is hard enough. It is crucial to have a sound process that will enable you to perform this difficult task with intellectual honesty, rigor, creativity, and integrity.
The best thing any of us can do is focus on things that are highly likely to produce good results. It may not lead to the desired outcome of championships or gold medals or phenomenal returns every single year but it does lead to gradual improvement and progress.
The risk is in how people react to a bad outcome. That’s the point where people get themselves into trouble. Was the process the problem or was it just a bad result? Not being able to separate the two leads to poor decisions and mistakes.
I think most athletes know that their desired outcome, no matter how much they want it, is a really difficult thing to achieve. They can do all the right things and still get beat. Their process is designed to get the best probable results. And faith in that process plays a big part in not getting bogged down by losses (bad outcomes).
I also think that a lot of investors fail to understand that.
Imagine an athlete who scraps everything and starts from scratch because they failed to win a game or fell short of Olympic record results. Yet, many investors consistently do this when their portfolio returns don’t live up to their expectations or relative performance envy.
No matter how hard an investor tries they’ll never control the outcome — the returns.
A sound process will never eliminate bad outcomes entirely. It can lower the chance of bad outcomes happening. So that, over time, a sound process will produce more good outcomes than bad.
18th Annual Graham & Dodd Breakfast 2008