In Annie Duke’s excellent book Thinking in Bets1, she begins with a task: think of the best decision that you have made over the last 12 months and the worst. She guesses that your choice of the best decision was something that ended well and that the worst was something that ended badly. Your choice is influenced by the outcome (a natural human approach) and is unlikely to have taken into account the process employed to make the decisions, nor the role that luck – good or bad – had played in the outcome. As a former leading professional poker player (Annie Duke was the winner of the World Series of Poker in 2004 and the previous leading women’s money winner in WSOP history), she is perfectly educated in the role luck has played in the game of poker and therefore understands that good outcomes can come from bad decisions and vice versa. To be successful at poker over the long term, one must employ a process of decision making that leans the statistics in your favour, that protects oneself from ones inherent human emotions, and that is practical and repeatable.
Investing is the same. One must make a series of decisions again and again over many years, based on an unknown future. There will be occasions when you get a bad outcome from a good decision and equally (the most dangerous scenario) a good outcome from a bad decision. Luck, more often than one would like to admit, plays a role and hence we view investing as probabilistic.
One must therefore always put process ahead of outcome. The outcome teaches you very little for any individual decision. It is only at the aggregate level of the portfolio, encompassing many decisions over multiple time periods, that the outcome can impart any information, for then the role of luck is likely to be diluted in its effect. At the individual level though, not only does the outcome teach us almost nothing, more worryingly, it can teach us the wrong lessons. If all one had of someone’s process were the outcomes, it would be misguided to believe that one can learn anything about the process itself, in terms of where it worked correctly and where it made mistakes.
In order to learn and to build a knowledge base, one must apply the process. Only by understanding the mechanics of how a decision is arrived at, can one hope to differentiate the skill or error of the approach. Yet even this cannot be enough. As human beings we are prone to re-write history to make us look good. Even when faced with the facts of an error in the process, we will be driven by a desire to want to attribute it to bad luck!
Therefore, not only does one need to put process ahead of outcome, that process must also be disciplined, to ensure repetition of its application. Then, given this discipline and repetition, one has a better chance of being able to view its advantages and shortcomings in an objective way. Only then can you establish a culture which allows one to learn from doing. And the longer you do, the more you learn and the more you realise how much you still have to learn.
Which brings us back to the water2. The investment culture where one is “doing” the process is critical to allow for the process to repeat and be learnt from. A disciplined process, by definition, will not always be the current flavour of the market. The environment you work in must be able to tolerate periods of underperformance and bad luck. This not only requires a business which is durable, but a culture which does not encourage or reward short term success. If reward is governed by short term success, or relative success against your internal peers, as you all share the same reward pot, you simply create a culture where short term trend following becomes the aim. One is actively discouraged to stick to a consistent approach. In order to nurture a process, the environment requires an ownership model where the employees own the business and where that ownership extends to the individual teams – so owning their process and outcome, discrete from others within the business. Only then is one able to practice ones process in a consistent and repeatable manner, to enable the statistics to lean to ones advantage over time and for the team to learn from practice.
RWC understands the importance of this dynamic, hence its structure; it hires teams based on the rigour of their process and supports this through good and bad times. For if you give something statistically advantageous enough time, it will more likely than not deliver, irrespective of how lucky you might be. Ask any successful professional poker player.
No investment strategy or risk management technique can guarantee returns or eliminate risks in any market environment.
1 Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts – by Annie Duke, February 2018.
2 “How it started vs. how it’s going” – RWC Global Equity Income team as at 1 August 2021.
Unless otherwise stated, all opinions within this document are those of the Global Equity Income team, as at 24th August 2021.