The big idea and why it matters: Focus on process, rather than outcomes, is a key driver of success (“growth mindset”) in life. When it comes to investing, it’s easy to confuse an approach for a sound process, which can ultimately lead to investors doing themselves a disservice or – in the worst cases – permanently impairing their capital.
“It’s not that I’m so smart, it’s just that I stay with problems longer.” -Albert Einstein
Don’t tell people they’re smart.
As Andrew Huberman outlines in this clip, “Praise for intelligence can undermine children’s motivation and performance” (which also happens to be the title of the paper he reviews in that video). The concept doesn’t just apply to children; it ultimately comes down to a constant focus on process over outcomes. Don’t tell people they’re smart or talented; instead, tell them they’re doing a good job or their hard work (i.e., their process) is starting to pay off.
Perhaps my most significant oversight of growing up was failing to connect the dots between process, work, and eventual outcomes. By the time I was in sixth grade, I was getting pretty good at roller hockey (i.e., street hockey using a ball while skating on rollerblades – just to alleviate any confusion). I can safely say that I was far better than anyone else in my elementary school. But the purpose of this blog isn’t to brag about my super-cool 6th-grade self; instead, it’s to point out that it all makes perfect sense after some reflection on that time of my life. With eyes wide open, let’s focus on the importance of process in adult life and investing. Here we go!
Process, not talent
What is now apparent is that I was better than “the competition” because I had the best process. I played more hockey than anyone else in my grade. I also usually played with older kids from an early age because my best friend was my older brother, Tom, who was three years older than me. He didn’t hang out with kids my age; I hung out with kids his age. That all gave me an unfair advantage, so when I occasionally had the opportunity to play hockey against my peers, I dominated them.
Do you want to guess who the second-best hockey player in our school was? Unsurprisingly, the kid who played hockey with me most days after school (Jason S.). We logged consistent hours of roller hockey together – a daily after-school (and post-paper-route) routine of putting a net in the street and then skating around, stickhandling, and shooting balls. We never questioned it. We just did it. And it reaped benefits.
Fixed Mindset
Unable to recognize the positive correlation between my hockey effort and ability, I seriously (and sadly) thought that success was simply a matter of natural ability. In my defense, there were other things I spent quite a bit of time doing that my friends were just much better at – like riding BMX bikes (I could get around okay, but was never able to ride wheelies or bunny hop much more than the height of a curb) or skateboarding (I did ollie seven steps a few times, but could never get the board to flip for a 360 flip, for instance). I chalked it up to the natural ability that one possessed (or didn’t). Success was a matter of “talent” and big breaks, like the Pamela Anderson path to stardom: show up at a football game, get noticed on the big screen, and voila! – you’re the next face of Labatt’s beer and will soon dominate TV, magazines, and pop culture.
Hope is not a process.
Unfortunately, Pam Anderson’s story is the extreme exception to most human experiences (and still, I’m sure there was a lot of modeling, acting, and other work involved after she was discovered, so there was still a lot of work behind the fame and fortune). While we can’t control outcomes, we can surely tilt the odds in our favor by putting a sound process in place. When it comes to areas like planning for retirement income or portfolio management, some approaches can be mistaken for good processes. And if that approach leads one past the point of no return, it can be dangerous to financial security.
Avoidance is not a process.
Early in my career, when discussing their deep concerns about how they would eventually generate retirement income, a prospective client asked me, “Isn’t it better just not to know?” [If you’re wondering, the answer to that question is a resounding “NO!”] That particular example was so extreme that it was almost funny, in a sad way, but typically the “avoidance” strategy isn’t so blatant. More often, someone is contemplating a thousand different questions, and they don’t even know where to begin – more akin to “paralysis by analysis” or feeling overwhelmed.
Take a second and think about all the things that come into play regarding retirement planning. It’s easy to see how someone can get to that point: you have to figure out earnings, expenses, how to spend time, what you want for your family, how to create income from savings, cash reserves, plan for taxes, medicare options, social security decisions, etc. We need to consider all these things comprehensively, but it takes multiple steps to figure it all out, which is why the financial planning process is vital.
Market timing is not a process.
I’ve been in touch with plenty of people whose “investment strategy” is to hold an inappropriate amount of cash until they “know” it’s time to invest it. They admit longer-term investments (like stocks) are what they should be holding eventually, but it’s just not the right time yet. It wasn’t the right time when equity markets were down significantly back in 2022 (which would’ve been a great time to buy since many things were on sale), and it’s not the right time now that they’ve rebounded substantially.
Can people time markets in theory? Yes. Can they time them in reality? No, and they shouldn’t try because it can destroy wealth. From a long-term perspective, investing cash in solid companies right before a market downturn isn’t the worst-case scenario; the more destructive situation is sitting on the sidelines as markets trend higher over time. That’s why a sound process will implore a portfolio to be invested fully and appropriately for a given situation.
This edition is already running long, so we’ll continue next time with diversification pitfalls and hopefully even some Alts!
Until next time, this is the end of alt.Blend.
Thanks for reading,
Steve
