"There's a lot of noise when making a decision. Not in the decision itself, but in the making of the decision. It is possible that an algorithm, and even an unsophisticated algorithm, will do better because the main characteristic of algorithms is they're noise-free. You give them the same problem twice, you get the same result. People don't."
- Daniel Kahneman keynote at the Morningstar Investment Conference in Chicago 2018
What is the one thing that investors want from a manager? Consistency in performance. There is value in the "smoothness" of returns. Smoothness is not the same as volatility. A manager can be volatile but still be consistent in that it applies the same reasoning to the same set of facts or market conditions. The smoothness comes from the fact that returns will match a set of factors that can describe the investment decision process.
Decision consistency or decision noise reduction is important across all professions. We want a radiologist to reach the same diagnosis for the same x-ray. We want a judge to rule in the same way for a similar crime. And, we want a money manager to behave the same when faced with the same economic conditions.
Return consistency is achieved through the same application of decision-making. Having the same process for decisions should reduce performance noise in that the performance pattern will be similar given the same set of price behavior. It will not ensure protection from loses, but consistency may allow for longer-term success. Of course, if the wrong process is applied consistently, there will be a problem.
Of course, some will say all decisions are situational and cannot be placed into a neat framework. No situation is exactly the same, but we believe the odds are more favorable when a disciplined approach is applied. Consistency should be a fundamental issue for discussion during a due diligence.
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