New England Patriots' fans may still be in pain over coach Bill Belichick's risky, and failed, choice to throw a pass for a first down when he was at fourth-and-two against the Indianapolis Colts on Sunday night. On the Pats' 28-yard line with just over two minutes on the clock, the botched play eventually cost New England the game, leading to Monday morning quarterbacking that dragged all the way into Tuesday.
It's not much consolation for the Pats, but there's an investing lesson here, says Michael Mauboussin, chief investment strategist with Legg Mason Capital Management and author of Think Twice: Harnessing the Power of Counterintuition. The question comes down to how you make your choices -- whether you're a football coach or an investor. Do you make your decisions based on a well-honed process or based on the eventual outcome?
In investing, like football, where results are based on probabilities, it is more important to focus on developing a sound process since that will lead to better results over the long haul even if it doesn't pay off all the time.
In his Sunday night decision, Belichick appeared to stay true to his process. According to The New York Times, the Patriots are 17th in the league in "fourth-down efficiency" having successfully converted fourth downs five out of 11 times. For investing, the analogy to the furor over Belichick's play would be investors second-guessing a stake in stocks during 2008 -- a year during which the Standard & Poor's 500 Index plunged by 37%. Disappointing results? Absolutely.
But do that year's horrible returns mean that investing in stocks is a bad idea? Hardly. Indeed, investors who have developed a solid process -- who divvy up their stock and bond allocations according to their risk tolerance and age, and who regularly contribute to their investment portfolios -- will over the long haul have a better performance than those who invest on whims or impulses.
"Sometimes a good decision will yield a bad outcome, and a bad decision will yield a good outcome," according to Mauboussin. "But over time, a good process provides the best chance of enjoying satisfactory outcomes." Patriots fans should remain hopeful that the process will deliver next time.
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