Why We Focus On Process Over Outcome

First, let's start with the headlines. Reliance Retail to acquire Future Group's units for $3.4 billion. News that sent the stock higher by 20% in one day, leaving a lot of investors with FOMO (fear of missing out) and jealousy.

Why didn't I own this? I should've seen this coming. I could've made 20% in one day. My neighbor owns it and he knows nothing about stocks!

And equally on the downside as prices retraced that entire move in the two days following. Why didn't I short this? I knew this was coming. I could've made 20% in two days.

For us, the answer to both sides of those questions is exactly the same.

We weren't involved in the stock because it's been a complete mess for years, so our process told us to stay away from it.

Here's Future Retail Ltd. on an absolute and relative basis since late 2016. As we can see, prices peaked in 2017 and have been trending to the downside ever since.

And despite the massive rally in stocks since March, Future Retail Ltd. has been stuck below support on an absolute basis and relative to the Nifty 500. And even with its 20% rally, it was still in a confirmed downtrend!

Click on chart to enlarge view. 

And here's Reliance, exhibiting the exact opposite characteristics. A stock that's in an uptrend on an absolute and relative basis. A market leader.

While Reliance may not have gone up 20% in a day, it has quadrupled in price during the time that Future Retail has been in a downtrend. So while one day of price action may have made it look like we lost the battle, in reality, Reliance won the war a long time ago.

In other words, our process which focuses on owning the strongest stocks and shorting/avoiding the weakest ones did its job. It kept us out of a losing stock and had us participating in the massive upside of the winner.

We're happy to miss moves like Future Retail Ltd. because we had no business being long it based on its weak relative strength and our objective of finding favorable reward/risk opportunities for the next quarter (and longer).

So the next time you see a stock that's up a lot, ask whether you missed it because you didn't execute your process correctly...or if it was simply a situation that fell out of scope? Chances are it's likely the latter.

You can't own everything and catch every move, so it's important to have a repeatable process that allows you to extract money from the market consistently over time. And by having that, it's a lot easier to watch these types of moves and feel fine about not participating in them.

Process > outcome if you want to be involved in markets for a long time.

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Thanks for reading and please let us know if you have any questions!

Allstarcharts Team