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Monday, December 12, 2016

Process and Outcome

This is a general observation from reading the Pareto Principle, named after the economist Vilfredo Pareto.

The principle states that 20% of the invested input from the process is responsible for 80% of the outcome.

The thing about process and outcome is it follows the general correspondence trend of causes and effects. You have to first have a process which will results in an outcome. The interesting thing about the two is that they are not necessarily correlative in nature. A good process may not lead to a good outcome and a bad process might not lead to a bad outcome.

I've been relatively successful today because I'm grateful for what I have. But I often wondered had I studied a lot harder in the past would I had become a lot more successful today. Perhaps a doctor or lawyer is in the making. And the fact is I'm not today. Things can also go the other way and perhaps I'd be a lot worse position than what I am today. It's entirely possible. I'm not ruling that out.

In investing, there are 4 possible scenarios that could play out.

1.) You had a good process and a good outcome.

2.) You had a good process but a bad outcome.

3.) You had a bad process but a good outcome.

4.) You had a bad process and a bad outcome.

To begin with, it's difficult to quantify what's "good" and "bad" means.

In mathematics, 1 + 1 is equal to two and it is quantifiable.

In investing, who is there to tell you that your process is a good method. Neither you, me or our friends are able to proof it with certainty. I always like the elephant example because every time there are buys and sells in the market, people on the both side of the trades think that their strategy is superior.

If I'm buying a blue chip and it rises 10% next week, does that mean I am on the right process? The outcome certainly advocates that it seems like it is the right process. What if luck plays a part in this? What if the law of large numbers come into play, i.e you do this for 1000 times and you managed to get it right for the majority part of the time?

There are many paths to Rome and there are many different strategies to investing.

Some may have a heavy flavor to value investing approach and even within that there are many different ways to approach it. Some favors technical approach and it worked perfectly for them. Some are mixed approach which for some reason just work well for them for years.

Regardless, there's no right or wrong process. An outcome can best tell you if you are walking in the right direction but that does not mean that your process is best optimal. Be flexible, learn from mistakes, enhance one's process and note the outcome.

You'll eventually know what you are getting into.


  1. Outcome and result after 1000 tries should be sustainable

    1. Hi Uncle CW

      So far around 700 trades for me in 6 years.

      Soon I'll be able to know if my method works or not ;)

  2. Outcome and result after 1000 tries should be sustainable

  3. B,

    And interesting observation from the investment perspective on what we traders know:

    1) One Good Trade mostly makes money; sometimes don't.

    2) One Bad Trade usually lose money; but sometimes we win instead!?

    Wisdom is when we can tell them apart, and have a good laugh from time to time.

    But we'll never mistake luck for skill.

    If we do, it never usually never ends well...

    1. Hi SMOL

      Luck and skill sometimes are not easily distinguishable.

      If we can laugh and joke about it, it means we know what we are capable of and ready to accept for what it is.

      The worse part is people around who cannot accept nor distinguish the two. Die

  4. I think I'm in the "You had a bad process but a good outcome" quadrant. >.<

    My asset allocation, erm, leaves much to be desired. I need to work on this area.

    1. Hi UN

      Oh no :( I hope that's not the case.

      I'm curious enough to understand how do you self-examined your own process and outcome though. It seems that you are self-aware about your own situation.

    2. 1). Because my portfolio allocation is imbalanced. :/

      2). I allow myself to "make exceptions" to initiate some positions

      3). There are still considerable gaps in my knowledge about some counters I have in my portfolio

      4). I think I am over-investing

  5. Good process doesn't mean we win all the time. It only reduces the chance of a bad trade. A good process should Ensure we have more winners than losers in our stock portfolio.

    1. Hi SR

      Good point there.

      Still, we need to refine the process so that there's higher chance of reducing a bad investment there.

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