Resulting all over the place

You often hear people talking about results and outcomes. The last act and the final step. A whole lot of them do not fall into the ‘desired’ category, of course. But when you’ve been told to optimise for results and outcomes, you end of using this one final step as a yardstick to measure yourself and your decisions. All of us have fallen into this trap, despite of knowing that this one final act may or may not have been influenced by forces outside your control.

Annie Duke, a famous poker player and the author of Thinking in Bets , famously puts this as “Resulting“

“Our biases lead us to think that if we have a successful outcome, we’ve made a good decision; but if we have an unsuccessful outcome, it’s bad luck. People also tend not to take the blame for their own mistakes and, therefore, do not really move forward in learning how to be more successful.

Annie adds that if you’re judging the quality of a decision from afar, we judge the decision based on results. If it’s a bad outcome, we assume it was a bad decision and vice versa. We ignore how much luck plays a role in the equation.”

If you look at the current market environment, you would realise that there’s Resulting all over the place.

Good decision – Bad decision

Its no secret that the stock markets have had a rocky start to 2022. The MSCI World ETF – $URTH ( a proxy for the global developed markets) is down 7.5% this year. The S&P 500 and Nasdaq 100 have almost lost 9% and 15% respectively. The tech and growth stocks are completely bombed out with drawdowns of more than 50% from their peak. The winners of last two years have lost bad and ugly this year in the space of 50 days or so. Even good companies with great businesses have seen massive price declines.

$FB (Meta Platforms) has lost $300bn in market cap this year (-38%), most of it after the stock fell 25% post its latest earnings results. The metaverse narrative, which last year was being commended and hailed as the next big thing, is now been turned on its head. Those billions of dollars that the company plans to spend to create a new growth market and pivot from the existing saturating one is now a complete waste. A great decision last year is now a bad decision as the stock was punished. The outcome (the stock price) is doing all the talking.

$NFLX (Netflix) too has shredded a ton of its value this year. The stock price fell almost 30% after its most recent earnings results as the management talked about slowing growth in streaming post the pandemic. Did we not know that the huge surge in online services like streaming, gaming, video etc. has been pulled forward by this event? Netflix has already made its intentions clear towards moving into gaming as its core market matures. But wait! Its down 40% so streaming is dead. Bad decision.

By fixating ourselves and our beliefs on only the results, in this case the stock prices, we forget to pay attention to the underlying processes that went into making those high-impact decisions. We let outcomes make us believe that $FB is going after a worthless vision. And that streaming is a bad business. There’s a bunch of examples that could be cited here. Companies with good business models and great management teams behind them are now out of favour because look at their price declines!

Another clear instance of Resulting could be how everyone was a great investor in 2020-21 because they were up 200% by speculating and concentrating their portfolios into liquidity driven growth sectors. But now even good investors who have done it during different market regimes and cycles are done as they are down 10% this year.

A lot of these outcomes are being influenced a big big headwind in the form of higher rates (or the expectation of higher rates), a rotation into the beaten down names from the pandemic years, traders and investors taking off their profits from last year’s gains, some leveraged long trades being unwinded due to a sector related sell-off, and many more.

These cyclical drivers are out of anyone’s control but your investing process is not.

Process over outcomes

The final score doesn’t tell the whole story. This not only applies to sports, but is an important reminder in life and investing too. Optimising for outcomes can take away the spotlight from the decision making process. It might work once or twice, but it leaves the blind spots uncared for.

A setback in life does not mean you’re not good at whatever you were working towards. A bad result does not define your ability to succeed. But a robust decision making process can ensure you can separate what worked and what doesn’t once you have to start again. It also helps you have in place the ‘the drawing board’ to which you can come back to again and again. This could look like a checklist of to-do’s before you take a high impact decision, or thinking about first and second order effects of your expected outcomes, or other mental models like Red teaming.

In investing, outcomes are clearer. You get marked every single day, especially in the public markets. With such instant feedback, it is easier to get carried away by both good outcomes (gains) or bad (losses). Having a process would help you separate luck and skill and help you control your error rate. This could look like having an investing checklist, knowing what game you are playing and thinking in probabilities about your expected outcomes.

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When there is Resulting all over the place, you can test-drive your process in real-time. Process over outcomes. You can control former, but for the latter you never know.

Until next time,

The Atomic Investor