One of my basic trading tenets is:
The stock market is a statistical world and both good and bad luck affect our results. However, if you constantly make good decisions and manage risk effectively, the probability of success is high.
If you are lazy about managing risk and make quick decisions, giving little consideration to which decision is likely to give the best bang for the buck, then luck — both good and bad — will play a large role in your overall performance.
We know that 90% chances do fail to come true one time in 10. Therefore even “good” or “the best possible” decisions lead to occasional losses.
This same line of reasoning appeared in a recent Barry Ritholtz article in the Washington Post..
Outcome is simply the final score: Who won the game; what numbers came up in a roll of the dice; how high did a stock go. Outcome is the result, regardless of the method used to achieve it. It is not controllable. You can blow on the dice all you want, but whether they come up “seven” is still a function of random luck.
Process, on the other hand, is a specific methodology. It is a repeatable approach to any challenge or endeavor, be it construction or medicine or investing. And you can control a process.
What kind of people are outcome-oriented? Gamblers, many (but not all) sports fans and, of course, speculators.
What about the process-oriented people? They include airline pilots, professional sports coaches and, of course, long-term investors.
Luck is ever present, but If your process is solid, if your decisions are intelligent, you are less likely to depend on a strict rolling of the dice.