You don’t know jack about what the market is going to do. Neither do I. None of us really do. Falling back on investment process is the only way to survive in the long run. Bob Seawright of Above the Market has a great commentary on investment process and randomness:
In what [Daniel] Kahneman calls the “planning fallacy,” our ability even to forecast the future, much less control the future, is extremely limited and is far more limited than we want to believe. In his terrific book, Thinking, Fast and Slow, Kahneman describes the “planning fallacy” as a corollary to optimism bias (think Lake Wobegon – where all the children are above average) and self-serving bias (where the good stuff is my doing and the bad stuff is always someone else’s fault). Most of us overrate our own capacities and exaggerate our abilities to shape the future. The planning fallacy is our tendency to underestimate the time, costs, and risks of future actions and at the same time overestimate the benefits thereof. It’s at least partly why we underestimate bad results. It’s why we think it won’t take us as long to accomplish something as it does. It’s why projects tend to cost more than we expect. It’s why the results we achieve aren’t as good as we expect. It’s why I take three trips to Home Depot on Saturdays. We are all susceptible – clients and financial professionals alike.
As a consequence, in all probabilistic fields, the best performers dwell on process. This is true for great value investors, great poker players, and great athletes. A great hitter focuses upon a good approach, his mechanics, being selective and hitting the ball hard. If he does that – maintains a good process – he will make outs sometimes (even when he hits the ball hard) but the hits will take care of themselves. Maintaining good process is really hard to do psychologically, emotionally, and organizationally. But it is absolutely imperative for investment success.
I flipped Mr. Seawright’s paragraphs around, but that’s just how I think. The emphasis is mine, but I think Mr. Seawright is correct about all of this. We are often attracted by shiny things, by the hedge fund manager that had the big hit last year, but the real winners are the investors with a great process that they stick with through thick and thin. Those investors often sustain good track records for decades. Maintaining good process is really hard to do, but the rewards over time make it worth the effort.