The Secret to Achieving Your Goals
“A bad system will beat a good person every time.”
—W. Edwards Deming
It’s that time of year for, “40 New Year's Resolution Ideas to Start 2022 Right,” or, “22 New Year’s Resolutions You Can Actually Keep in 2022.” It is thought that we (humans) have been setting New Year’s Resolutions for nearly 4,000 years. Several studies indicate that roughly eight of 10 resolutions fail. That is a staggering number of bad processes over the last 40 centuries!
James Clear, the author of “Atomic Habits,” sums up the problem well: “New goals don’t deliver new results. New lifestyles do. And a lifestyle is not an outcome, it is a process. For this reason, all of your energy should go into building better habits, not chasing better results.”
We find this to be analogous to the investing and planning process. The client’s desire for a specific outcome is often the impediment for achieving that outcome. Instead, a focus on the process itself keeps clients aligned with the appropriate behaviors necessary to arrive at the determined destination, ultimately achieving their goals.
In this blog, we discuss the value of having a trend following investment process, especially during the time of year when predictions run rampant. Having a process empowers you to ignore willy-nilly predictions altogether and gives you the blueprint for how to react to various market conditions.
Process vs. Outcome
As we wrap up 2021, let’s take inventory. First, here’s a high-level snapshot of performance for a few major asset classes.
- S&P 500: +29.4%
- ACWI: +19.0%
- Agg Bond Index: -1.9%
- Commodities: +40.4%
Source: Morningstar, as of December 29. S&P 500 = ETF:SPY, ACWI = ETF:ACWI, Agg Bond Index = ETF:AGG, Commodities = ETF:GSG.
The S&P 500 had what can only be described as an incredible year, rising 28.7% and making 70 new all-time highs (only 1995 has more). And all of that without a daily drawdown of greater than 5.1%. But, surveying the macrosphere, U.S. stocks now appear to be grossly overvalued:
- The Buffett Indicator of market cap to GDP is at all-time highs
- Shiller CAPE ratio near all-time highs (only tech bubble is higher)
- S&P 500 price-to-sales ratio is at an all-time high
Like I said, overvalued…Or is it?
There are also many commentators, managers, and research analysts who say stocks are undervalued because of these factors:
- The S&P 500 P/E to start was 22.5x, but the "earnings" in the P/E ratio are up 36% this year, prices are +26%, and the P/E is down to 20.8x (source: FactSet)
- Historically strong S&P 500 revenue and operating earnings growth
- Negative real interest rates
So, here’s the summary:
- Stocks: all-time highs
- U.S. home prices: all-time highs
- U.S. wages: all-time highs
- Job openings minus unemployed persons: all-time highs
- Inflation: highest since 1982
With all the noise and contradictory data, how do you keep focused on what’s most important? The answer is process.
We talk often about our systematic process and how the “secret sauce” is not complex algorithms but elegant rules combined with disciplined execution. Thus, employing a comprehensive planning process to codify your long-term financial goals is only part of the equation. We’ve found that while goals are integral for designing progress, systems and processes are essential for making progress.
As we enter 2022, instead of making resolutions, how about you instead conduct a thorough review of your critical processes? It’s certainly not as fun as thinking about the goal itself, but as the data shows, without these processes, the likelihood of you accomplishing the desired result decreases dramatically. In our opinion, it is best to maximize our odds of reaching the goal by minimizing the chance of being wrong in a big way. That is what a robust process can do.
From a market perspective, we have just one goal in 2022, and that is to follow our process. We saw the benefit of this laser focus in 2021. Who could’ve imagined that 2021 would result in such a positive year for U.S. stocks? Or that real estate would outperform equities despite rising interest rates? Our trend-following process had no opinion about the future direction of asset classes and yet gave us the best chance of being positioned appropriately. Any second-guessing, opinions or supposed foresight would have cost us in 2021. We suspect the same will apply going forward, and therefore our focus will remain on executing our process.
At Solas Wealth, we help individuals and families maximize their returns, plan for the future and make smart investment choices. Speak to one of our trusted financial advisors today to help you plan for the coming tax changes and keep your money protected.