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.

Source: 18th Annual Graham & Dodd Breakfast 2008

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