Make good choices, and results will come

11/24/2008


In a business setting, the statement, “He’s all about results” is considered a compliment.

But if you look past the obvious, focusing entirely on results can be a mistake. Here’s an example:

Suppose two men ask me how to cross the street. I tell Joe to look both ways and cross only when no cars are approaching. I tell Bill to close his eyes and walk slowly across the street without stopping.

Let’s assume both men follow my advice. Joe gets pancaked by a car he didn’t see despite the fact that he looked both ways, while Bill proceeds safely across the street because no cars were coming.

Given the fairly simple example, it isn’t difficult to determine that Joe received the superior advice, even though Bill achieved the superior result. But in more complex situations, we humans tend to conclude that if we succeed after taking a particular action, that action was, at least in part, the cause of our success.

It’s all about your focus
A results-oriented outlook centers around attempting to duplicate the circumstances that preceeded a positive result. The S&P 500 Index rose at least 19% in each of the five years from 1995 through 1999. A strategy of buying fast-growing stocks regardless of valuation worked well during much of that period.

Of course, anyone who had money in the market in the spring of 2000 knows that such a strategy has a limited shelf life. Decades of academic research have proven that stocks with low price/earnings ratios tend to outperform those with high ratios. Yet many investors who should have known better continued to buy stocks at incredibly high prices during the late 1990s.

At the Forecasts, we prefer a decision-oriented approach. Decision-oriented investors don’t ignore results, they just expect that over time, superior decisionmaking will result in superior results.

Decision-oriented people tie actions to their consequences. It doesn’t take a genius to realize that if 100 people followed Joe’s lead and another 100 people followed Bill, most of the first group would make it across the street safely, while the second group would suffer a lot of casualties.

As investors, we cannot afford to look beyond results. The average stock in the S&P 500 Index is down 47% this year. That’s not just a number on a page, but reflects real-money losses for those of us who own stocks in the S&P 500. However, focusing entirely on results can lead us to bad decisions.

Stay the course
Results-oriented investors see most stocks going down and come to the obvious, if short-sighted, conclusion that the best strategy is to sell everything to avoid further losses. That strategy feels good today, and may feel even better next week if the market has a couple bad days. But a year from now, or perhaps even three or six months from now, your results-oriented strategy could have you smelling the exhaust of a bull-market train that passed you by.

Stocks have generated much higher returns than cash equivalents over the last 80 years. History tells us if you give them time, stocks will rebound and generate wealth. Our research tells us that stocks with high Quadrix scores should generate greater wealth than the average stock.

For decision-oriented investors, the course is clear. Hold some cash, but maintain exposure to quality stocks. The ride gets bumpy at times, but this train is still the best way to get where you want to go


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