Often, when looking back at past investment decisions, we allow ourselves to make the mistake of outcome biasness. This is where we use the outcome to determine the validity of our decisions. While the outcome may be a failure, does it necessarily mean we made a bad decision? In this article, I would be using my investment in Petrobas as a case study.
Outcome Bias - Petrobas Investment
We initiated a position in Petrobas at roughly USD7.10. Seeing the run up in prices and shifting our investment mandate to focus purely on investment opportunities in Asia, we sold out our position at USD9.69. This translated to a investment return of +36.5%. Fast forward today, it is currently trading at USD4.92, translating to an unrealized loss of 30.7%.
This got us thinking, so was our investment decision right or wrong? With the run up in prices initially, I did believe that our investment thesis was right and it was events were unfolding as planned. However, with the prices crashing from that point was everything just luck and our investment thesis completely wrong?
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Outcome Bias - Evaluation
Looking back at the thesis, I do believe it was logical and well-thought-out. The quality of the process that led to the investment decision was definitely not one that was rushed or haphazardly done. However, I would admit that such an investment decision was one where we deviated from all our norms and broke all our rules. While we were able to replicate an asymmetrical risk reward scenario with the investment in Petrobas, the probability of it working out was probably not in our favor on hindsight. Not only are commodity companies capital intensive making them investments that are very hard to work out, it was mixed up in a political scandal as well.
Outcome Bias - Summary
The fact that something worked doesn’t mean it was the result of a correct decision, and the fact that something failed doesn’t mean the decision was wrong. This is at least as true in investing as it is in sports.
— Howard Marks, Inspiration from the World of Sports Memo
While there are logical reasons for arguing that our decision made sense, I do feel that the profit made on this investment is more luck than skill. Of course, in the next few years it may end up as a double or even triple bagger, however, it does not change the fact that this investment decision was wrong despite us having profited from it. However, the key takeaway here is that the correctness of a decision cannot necessarily be judged from the outcome.