Process Over Emotion: What John McCain Knew That Most Investors Don't

As John McCain was laid to rest a few weeks ago, we were reminded of his heroism, his life of service to our country and one of his last acts a sitting Senator: delivering the final blow to the proposed healthcare legislation in 2017, known as the Graham-Cassidy bill. Regardless of where you stand on McCain’s politics or the state of healthcare in America, it’s important to understand why McCain, one of four Republican Senators to vote “no” on the bill, did so.

McCain’s objection was not to the bill itself, but to the process. A longtime proponent of “regular order,” McCain’s opposition stemmed in large part from how the bill was being pushed through the Senate in an effort to meet a procedural deadline. "I would consider supporting legislation similar to that offered by my friends Senators Graham and Cassidy were it the product of extensive hearings, debate and amendment. But that has not been the case," McCain said.

Process is important because choosing to follow or ignore a process can drastically alter a desired outcome. Think about what happens when a surgeon fails to follow process during a routine surgical procedure. The outcome can be anything but routine. It’s also why our military incorporates layers of redundant checks and balances. Lives are lost when proper procedures aren’t followed. Process also applies to our investment strategies and is a leading reason why the most successful investors tend to be the most disciplined investors – they understand the importance of process.

Take the current bull market, which recently crossed the mark to become the longest on record. What was your immediate reaction to that news? Did you think: “I need to pour more money into the markets now before I miss out” or “I need to take my gains and bail while the going is good?” You may be surprised to learn that neither reaction is in your best interest. That’s because both reactions are based solely on emotion, not logic or reason. As the renowned investor Peter Lynch once said, “The trick is not to learn to trust your gut feelings, but rather to discipline yourself to ignore them.”

As multiple industry and academic studies have shown, investment success is largely influenced by two factors: 1) investor behavior and emotion, and 2) adherence to a disciplined process over time. To understand why, we need to start with a basic premise: while financial markets are unpredictable in the short-term, they offer the potential to generate wealth over the long-term.

As such, investing has historically paid the greatest rewards to those adhering to a consistent and disciplined approach that seeks to remove emotion from the investment decision-making process. In fact, according to DALBAR, a leading financial services market research firm, investment results are more dependent on investor behavior than on investment performance. The company’s 24th Annual Quantitative Analysis of Investor Behavior (“QAIB”) states that “no matter what the state of the mutual fund industry, boom or bust: investment results are more dependent on investor behavior than on fund performance. Mutual fund investors who hold on to their investments are more successful than those who try to time the market.” That’s why having a disciplined investment process in place is your first line of defense against emotional and reactive decisions making.

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