“Don’t confuse a bad outcome with a bad process and vice-versa.” – Bill Miller, Legg Mason
Investors confuse success with positive outcomes. They make an investment and if it works out they pat themselves on the back. Over time one’s process is what will determine success. Luck will dissipate and your process, whether good or bad will show through. To invest successfully you must have a good process.
Benjamin Graham wrote the blueprint for an effective investment process in The Intelligent Investor: " An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative." Why not follow this simple definition that has bred so many successful investors.
Investors spend their lives searching for a secret to get rich quick. It does not work, eventually the multiple get rich quick decisions are aggregated and the inferior process shines through. Investors must be patient and follow Graham’s prescription for an investment operation to ensure their process is on track.
One must ensure their process is correct by doing a thorough analysis on companies. There are excellent analyses on www.valueinvestorsclub.com that can viewed via delayed access. One will get a feel for the thoroughness of other successful investors, and with practice will be able to develop their own thorough analysis process.
One must purchase securities with a “margin of safety.” This term was coined by Benjamin Graham in his textbook Security Analysis 1934 edition. After thorough analysis in which one comes up with a final appraisal for a business, one must purchase this business only if it trades at a discount to its intrinsic value, giving the investor their margin of safety. One cannot afford to compromise on this principle.
Graham’s last sentence sums it up perfectly. When an investor purchases securities without completing a thorough analysis or not incorporating a “margin of safety” they are running a speculative operation. An aggregation of speculative decisions is destined for investment failure. It seems simple but one must posses the psychological framework and stick to it. Avoid the get rich quick mantra, and have a successful process. Follow Graham’s prescription for an investment operation and one will achieve a successful lifetime of compounding money at above average rates.