Why you need an investment process

The number one reason that most investors fail to beat the market over the long term is a lack of process. It’s not even that they have a bad process – they just don’t have any process at all, at least not one that’s worthy of the name.

If you want to succeed as a stock picker, you have to have an investment process. It’s just crazy that someone would think they can beat the market by reading some news and investing in those companies that they think will do well.

You might as well flip a coin.

There are countless investors on forums all over the web, looking only at last year’s results and sometimes just the last quarter’s. They follow the latest news and speculate about the economy and how that may or may not impact this or that company.

In most cases, it is a colossal waste of time and effort because the evidence against that sort of vague, short-term, ‘seat of the pants’ investing is huge.

On the other hand, several studies have shown that any reliable way to beat the market is likely to be based on a repeatable process which is based on a fixed set of measurements and principles.

Those measurements and principles should, in turn, be based on research and should have proven themselves to be reliably better than the short-term, news-driven alternative.

Fortunately, it turns out that both the principles and many of the tools have already been developed and tested, sometimes over decades. So all we need to do is find them, understand them and apply them.

Something I find endlessly amazing is that none of these principles or tools has to be complicated.

You might think that, with all those highly paid, highly intelligent people working in the investment industry, you’d need a super-computer to run 24/7 in order to stand a chance. In fact, the opposite turns out to be true.

By avoiding any attempt to be clever, you can actually give yourself a massive advantage over the professionals who are all tripping over each other, trying to guess what the market’s going to do in the next week.

The real trick to beating the market is to have the right mindset, and for me, the right mindset is this:

Investors should concentrate on building a portfolio that can beat the market, rather than trying to pick individual shares that they think will become big winners.

Author: John Kingham

I cover both the theory and practice of investing in high-quality UK dividend stocks for long-term income and growth.

4 thoughts on “Why you need an investment process”

  1. Great article, though I don’t entirely agree.
    I know someone, very close to home, who simply invests for news related events- relying on “Buy on rumour and sell on news” style trading. He is now close to a millionaire and more than anything, he has a process, keeps it very simple, and is consistent in applying his process in regards news driven trading.
    Each to their own.

    1. Hi Sparkstrader, I think you’re right to not entirely agree.

      If someone has a process that relies on news and they can make it work, then fair enough, they’ve done a fantastic job. But that sort of strategy will typically require the investor to be better than the rest in the degree of skill which they apply. There are so many short-term traders doing this sort of thing that to make money doing it is just not a realistic proposition for most people.

      On the other hand, I think that most people who can stick with a strategy that ignores news and looks at long-term fundamentals are likely to do well, regardless of skill levels. That’s because all the hot money and all the brain power is focused on periods of less than a year. Just about nobody looks at longer-term, multi-year periods; both in terms of the financial results of companies and the time-frames in which excess returns can be expected.

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