Decisions vs. Outcomes
Recently, after reviewing our investment ideas for the last 12 months, we identified some good picks and not so good ones (like any other year). A few truly stood out among the best-performing holdings, and one particular stock doubled in a year and tripled since March. We immediately thought what a great idea it was! We paused, though, and asked ourselves: what were we really praising – the decision-making process or just the outcome? For years, picking stocks and managing money, I already intuitively knew they are not the same. It wasn’t until I picked up Annie Duke’s books, especially the most recent one – “How to Decide: Simple Tools for Making Better Choices,” that the distinction between the decision and the outcome became truly clear to me.
In investing, we often look at the outcome. The stock is up or down 50%, and the portfolio is up or down 10%. We sometimes compare it with the other stocks in a specific industry, the general market, a particular index. We judge the outcome on its own or compared to others or some predefined benchmark. As you can imagine, there are many ways to any outcome, from picking fresh fruit at the farmer’s market to buying a car or a house to making investment choices, and more.
Annie Duke, the best-selling author and a former professional poker player sheds more light on the difference between the decision making and the outcomes. She explains that when asked about past good and bad decisions, we all tend to think in terms of the outcomes we have gotten. If we liked the outcome, we tend to say it was a good decision. If we didn’t, it was a bad one. It’s not that simple, though.
The author proposes an interesting matrix with the following options: 1) good decision quality, good outcome quality = an earned reward 2) good decision quality, bad outcome quality = bad luck 3) bad decision quality, good outcome quality = dumb luck 4) bad decision quality, bad outcome = just deserts (what one deserves).
We at Sicart Associates focus all our efforts on the quality of the decisions that we make. We have a clear framework. We are managing family fortunes that our families can’t afford to lose. We want to preserve and grow their capital over the long run. We want to be the least wrong.
We like to keep it simple. We look for good businesses with good managements and prospects, and we want to buy them when they are down, cheap, and out-of-favor. We avoid high leverage, questionable managements, and secular decline. That’s our investment decision process. Any stock that meets that criteria, there aren’t usually many has a fair chance of finding its way to our portfolios. If we can’t find enough stocks that meet our expectations, we can let the cash levels go up. If we find many, the cash level drops. Each investment goes through its own cycle, from being attractive in our eyes to being less and less appealing – it either becomes too expensive, or its business starts to lag or both.
We believe that our historical results over the long run have been satisfactory. We actually like to keep a record and re-examine past and current holdings through the perspective of the outcomes we got and the decision-making process that led to buying, selling, or avoiding them. We continuously refine our qualitative and quantitative research by improving the picks and eliminating the potential lemons. Our criteria follow certain well-defined rules but are flexible enough to adapt to the changing realities. One of them has been the growing importance of intangible assets – intellectual property, network effects, brand, and the fading significance of tangible assets – buildings, machinery, inventory.
It’s not uncommon that we buy a stock, and we expect it to double in 3 to 5 years, but it not only triples or quadruples, but it does it in a year or two (we have plenty of examples of the exact opposite outcomes, too!). We take credit for the decision-making process that put the investment on our radar and our portfolios. At the same time, we are fully aware of conditions outside of our control that pushed the stock a lot higher and a lot sooner than we expected. We focus on buying them right, and we let them perform on their own schedule, so to speak — sometimes sooner, sometimes later than we might have expected.
It’s not rare that a stock disappoints us. It either takes a lot longer to perform, that’s something we are often willing to tolerate, but also it may go nowhere or worse actually drop significantly from where we bought it. We always have a choice to sell it and move on. That’s a decision in itself, too. It helps to know well what has caused it to perform the way it did, and if the investment case we started with doesn’t hold anymore, it’s our selling policy that propels us to part with it and look for better replacements.
Judging what we do only by outcomes, especially short-term ones, misses the deliberate, disciplined decision-making that takes place with every new stock addition or removal.
We know we can’t control all the outcomes, but we know we have full control over the quality of the decisions we make. We focus on continuously improving our process, tapping into decades of experiences shared by our team, and thoughtful feedback from our network of fellow investors. We have a regular practice of inviting guests to join us and poke holes in our investment ideas. This outside perspective keeps us sharp and helps improve the process even further.
In life and investing, it helps keep refining our decision-making process and letting the outcomes follow. It’s very tempting to lose faith in the decisions based on one or a few unsatisfactory results. It’s also tempting to alter the decision-making process based on one or a few lucky or unlucky results.
I know that we liked this particular stock’s performance this year, but we also went back and reread our notes to see exactly how this idea came about. We trust that it’s the latter that showed the quality of the decision-making process that led to identifying this idea and all the other ideas that joined and left our portfolios since then. Some bad decisions with good outcomes may help some investors win short-term races, but it’s only the good decisions that pay off in the long run, bringing earned rewards despite some bad luck here and there.
The information provided in this article represents the opinions of Sicart Associates, LLC (“Sicart”) and is expressed as of the date hereof and is subject to change. Sicart assumes no obligation to update or otherwise revise our opinions or this article. The observations and views expressed herein may be changed by Sicart at any time without notice.
This article is not intended to be a client‐specific suitability analysis or recommendation, an offer to participate in any investment, or a recommendation to buy, hold or sell securities. Do not use this report as the sole basis for investment decisions. Do not select an asset class or investment product based on performance alone. Consider all relevant information, including your existing portfolio, investment objectives, risk tolerance, liquidity needs and investment time horizon. This report is for general informational purposes only and is not intended to predict or guarantee the future performance of any individual security, market sector or the markets generally.