If you are reading this blog then there is a good chance that you invest in the stock market. So, how was yesterday in relation to investments? Did you buy those stocks which you like when they nose-dived? Did you take advantage of volatility that we were talking just day before yesterday?

We preyed on yesterday’s volatility and were successful to deploy almost 13% of our cash reserves in the market in our favourite stocks at our price and managed to gain close to 1% return on our funds in single day. Let me add here that we are still sitting on 27% cash in our funds. We were bit disappointed that two major event happened on same day (US president election & Indian currencies demonetisation).

As an investor, do you give credit to your skill for all your best stock picks and bad luck to bad outcomes, without fully considering your investment process? If that is true, don’t worry, you are not alone. But the recent volatility in the market suggest to develop really solid investment process – and let the outcome look after itself.

If you compare your decision with the outcome in the investments without looking at the quality of the process is known as outcome bias. It is much easier to get affected by outcome bias because i) outcomes are objectively easier to measure than processes; ii) it takes conscious mental effort when assessing a process to not be tainted by the outcome, and iii) investment outcomes are returns, and returns are ultimately what matter.

  Good outcome Bad outcome
Good process Deserved success Bad Break
Bad process Dumb luck Poetic justice


If you look at the above matrix, all the investors will prefer to stay on the left hand side of matrix then to the right. To achieve consistently good outcome you need to have good process.

Developing an investment process should be the first priority for the investor, whether they invest their funds directly in the stock market or through fund managers. A good investment process is the one which is built on solid foundation of the investor’s philosophy. If the investor’s philosophy is like the one we have, preservation of capital and investing only in the high quality businesses, then the process needs to be designed to identify businesses that generate high returns on their employed capital and have sustainable competitive edge or moat, which can be bought at discounted price.

Unfortunately, having a good process in place is only half battle won; the other half is to stick to that process. There are possibly two challenges that investor will face. First, even the best process can occasionally produce bad outcome. In this situation it is important to remember that even if the process which produces 99% of the time good outcome will still produce 1% of the time bad outcome. The other challenge is not to deviate from or make exceptions to the process, for example overpaying for the great quality business out of fear of missing out. This dilutes a good process and soon the investor maybe unwittingly celebrating dumb luck or brushing off poetic justice.

We have openly shared our process with you in all the details. We had also recently shared how we manage our portfolios and how we size stocks in our portfolio. Yesterday’s volatility helped us to deploy our 13% of funds in the market, with our favourite stocks at our price.

Will love to hear your stories of yesterday.

Aziz Dodhiya is the chief investment officer for the Valueoperations funds which operates in the Indian market as an FPI (Foreign Portfolio Investor). We do not offer any personal advice to buy or sell any stocks and the views that are shared by Aziz might not incline to your personal investment strategy and this is the reason we tell you to take professional advice before going ahead with our views.