Even if you are not an avid golfer, one look at this picture and you know certain things. One, you see a water hazard to the right of the green. You also know you have some sand hazards on the left. The back appears to slope downward and to the left, potentially increasing the damage if you "fly the green". The tee box is significantly higher than the green, which causes you to reconsider flight path and club selection. All this information is known.
But there is also some hidden information. How fast is the wind blowing off the ocean in the background? What's the direction and is it shifting between the green to the tee box? While you can see the green, you cannot get an accurate indication of the specific contours, angles, and subtle slopes all around the pin. Any experienced golfer could certainly cite more unknowns.
In many ways becoming a skillful investor is a lot like becoming a skillful golfer. But I know several good amateur golfers, ones who consistently shoot in the low 80s, that are lousy investors. Part of the success in the decision-making process of each activity can be determined by how well you manage three things - hidden information, your sample size, and knowing the difference between a good decision and a good outcome.
The most obvious known information you have when choosing an investment is price. If considering stock or an ETF, we can also quickly see the price for comparable securities. We can see things like recent trends, current related news, historical patterns, and prices. If you are considering an investment strategy, you have the returns. You can also compare it to comparable strategies during similar periods. But unless you can predict the future or your investment has a 100% chance of success, the fact remains there will always be some information that is hidden from you. That is the risk, and the more information about the investment that is unknown, the more the potential reward. Becoming better at handicapping the risk associated with hidden (uncertain) information is a lifelong skill in itself. But the main point for an individual investor is you must get comfortable with not knowing some things and accept them, instead of trying to always "be right". Experienced investors understand this. If an investment doesn't work out, they don't look at it as just bad luck, but as an occurrence that was within the range of potential outcomes, given the limited information, they had at the time of their decision.
Suppose you have only played golf one or two times in your life. Did you know that for one or two swings of the club, for one or two moments in time, you could put the ball closer to the hole than Tiger Woods? The likelihood of that happening again diminishes with each successive swing of the club. But the variability or range of potential outcomes is always the greatest over the smallest sample size. This is an extreme analogy, but it illustrates an important point in investing. Anything can happen with any investment or investment strategy over a short period. We always have to be honest with ourselves. Is the period were are looking at meaningful, and is the number of iterations enough to produce a statistically significant sample size? We see this flaw with investors when they use an investment or strategy's great quarter or a great year as the determining factor. One reason why this point is so critical is, after one or two good trades, we can easily start to feel "I must have done something right because I made money". And this leads to the third point.
You know right away if you hit a golf ball successfully, but the feedback you receive with an investment can take months or years. The result, in both instances, has a loose connection to the quality of your thought process and decision. When you chose an investment and it turns out well for you, how do you know it was the right decision? Since there was hidden information, can't that hidden information turn out good or bad? There is a word many proud investors don't want to hear. Luck. It can be good or bad. But if something is hidden (uncertain), and it is potentially harmful to your outcome, and you can't anticipate it or know it in advance, then how is a favorable outcome attributable to only skill and not some degree of luck? If it is true that a good process can still result in a bad outcome, wouldn't it also be true that a bad process sometimes still results in a good outcome? This is where a good process comes in. And a good process is about improving the quality of the decision so that you increase the chances of a successful outcome. That's why we should focus on the decision-making process and not the outcome. A true professional knows that if you focus on the process, also concentrating on those things you don't know, while always attempting to increase your odds of a favorable outcome, then over enough iterations, you will have a greater chance to be successful.
People have written separate books about each one of these points so there is so much more to think about. We've only scratched the surface, but these are some of the ones we see most often with the individual investor. Golf professionals have told me they think about a bad shot for maybe a second. They care far more about their process. They never confuse the outcome with the decision. If you want to be a successful investor, don't concentrate on successful investments, focus on becoming a successful investor. Successful investors consistently do those things, in a repeatable well thought out decision process, that always increases the chances of a successful outcome.