On process and relevant information (the Critical 20% that generates 80% of results)
At the outstanding Simoleon Sense blog, Miguel Barbosa interviewed James Montier, formerly of Societe Generale, now at GMO. The interview is available here. It is recommended reading. Among many highlights, two important concepts stand out, regarding process and relevant information.
Discussing the importance of process, Mr. Montier stated
My work in this field was sparked by listening to gold medal winners being interviewed at the Olympics a few years back. Invariably the interviewer would ask them what was going through their mind before the race started, where [sic] they focused on the gold? The response always came back that they were always focused on what they had to do (i.e the process) not on the outcome (the medal).
Process is the one aspect of investing that we can control. Yet all too often we focus on outcomes rather than process. Yet ironically, the best way of getting good outcomes is to follow a sound process. The research shows that holding people accountable for outcomes tends to lead to suboptimal performance, generally because they spend all their time worrying about the things they can’t control. I’d advise a far better approach to assess people on the criteria of adherence to process.
Comment: Amen. Sound, common sense-based processes should outperform many other alternatives (including buy and hold) over full market decline/rally cycles that take place within relevant investor time frames. For maximum repeatable market success, following a process is imperative. For maximum mental health while seeking maximum market success, understanding that no process will outperform all others all the time is also imperative.
Discussing relevant (more specifically, irrelevant) information, Mr. Montier stated
The sheer amount of irrelevant information faced by investors is truly staggering. Today we find ourselves captives of the information age, anything you could possibly need to know seems to appear at the touch of keypad. However, rarely, if ever, do we stop and ask ourselves exactly what we need to know in order to make a good decision.
Comment: It is of course old news that we are faced with infinite content and finite attention spans and ability to process this content.* Besides the flow bottleneck, it is important to realize that not all information is created equal. Once again the Pareto Principle, better known as the 80/20 rule, comes into play in that 20% of the available information is probably enough to generate 80% of the results. It is therefore imperative for maximum repeatable market success to narrow down the full information universe to the Critical 20% and focus on that information subset. For the KLD Capital “Critical 20%” (of information that generates 80% or more of the results), please see page 3 of this document.
*One can idly though legitimately wonder whether how much of an edge there is today to value investing, at least with regard to traditional, highly-picked-over assets such as stocks, when overwhelming amounts of data are available to anyone that can click a mouse. In reality the answer is still likely “huge” given that abilities are not distributed equally, and neither are abilities to control emotions.
