Investors always focus on outcomes when evaluating their success. But that approach has a major flaw. If that outcome wasn’t generated by a sound process, then it is likely the result of luck and also likely won’t be repeatable.

Consider two contrasting scenarios that perfectly illustrate a crucial lesson for investors. The first involves a day trader who experienced remarkable success during the cryptocurrency boom of 2017. Over several months, this trader generated impressive returns by following social media trends and timing market sentiment. Their approach involved monitoring Twitter activity, following popular crypto influencers, and making quick trades based on perceived market momentum. The short-term results were impressive, leading to a firm belief that they had discovered a winning formula.

However, this approach had a fundamental flaw: it lacked any legitimate edge over the market. No matter how well-timed the trades might have seemed, cryptocurrency prices are largely driven by factors beyond social media sentiment. Without a genuine, repeatable advantage, any short-term success is simply random luck rather than skill.

Contrast this with Renaissance Technologies, particularly their Medallion Fund. Founded by mathematician James Simons, the firm took a radically different approach to trading. Instead of relying on traditional financial analysis or market sentiment, they built a sophisticated quantitative trading system based on mathematical models and statistical patterns. They hired physicists, mathematicians, and computer scientists rather than traditional Wall Street traders.

Their process was methodical and evidence-based, but it wasn’t an overnight success. It took years to develop their models and refine their approach. Yet despite the initial development period, their systematic approach was fundamentally sound and eventually led to one of the most successful track records in investment history, with the Medallion Fund averaging over 60% returns annually for several decades.

These contrasting examples highlight a critical error many investors make: placing too much emphasis on outcomes, particularly over short time periods, while failing to evaluate the underlying process. When investment managers post strong returns over one, three, or even five-year periods, they often see significant inflows of capital. Yet most investors never dig deeper to understand whether these results stem from a repeatable process or mere chance.

Performance over periods less than five years contains more noise than signal – meaning it tells us very little about whether an investment strategy will succeed going forward. While longer track records become increasingly meaningful, the fundamental process behind the results always remains crucial.

So what constitutes a sound investment process? Several key characteristics stand out:

1. Evidence-Based Foundation: The process should be supported by extensive historical research demonstrating effectiveness over long time periods. Value investing and momentum strategies are prime examples of approaches with strong empirical backing.
2. Logical Framework: The underlying reasoning must be sound, with clear connections between inputs and outputs. Using arbitrary factors like social media sentiment to make investment decisions lacks logical foundation, while focusing on fundamentals like valuations or systematic patterns follows clear economic rationale.
3. Disciplined Execution: The process must be followed consistently through market ups and downs. Every strategy faces challenging periods, and maintaining discipline during these times is essential for long-term success.
4. Repeatability: Past success must be replicable going forward. This is where systematic, quantitative approaches often hold an advantage over discretionary management – they can more reliably maintain consistent execution over time.

Few investment processes satisfy all these criteria, and even those that do will test investors’ patience periodically. Renaissance Technologies’ sustained success validated their systematic, quantitative approach. Meanwhile, many crypto day traders from 2017 saw their fortunes reverse during the subsequent bear market, highlighting the difference between having a genuine edge and relying on temporary market conditions.

The lesson for investors is clear: when evaluating investment opportunities, look beyond recent performance. Focus instead on understanding the process behind the results and whether it provides a genuine, sustainable advantage. Consider Capital Group, known for their American Funds family. Their success over many decades isn’t due to making lucky market calls, but rather to a consistent investment process that includes fundamental research, multiple portfolio managers, and a long-term focus. Their process has helped them navigate various market cycles successfully.

In the long run, a sound process is far more valuable than any short-term success story. Whether you’re evaluating fund managers, considering investment strategies, or managing your own portfolio, the quality and consistency of the underlying process should always take precedence over recent results.