How Feedback Works

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A decade ago, a group of surgeons made a fascinating discovery about successful patient outcomes. Each surgeon anonymously submitted a video of themselves performing a bypass surgery, which was then rated by their peers on various technical skills.

It turns out, the primary factor in positive outcomes was not the surgeon's Ivy League education or the prestige of the hospital they worked at, but simply the number of times they had performed the procedure.

The idea that "practice makes perfect" is central to surgical training programs and is backed by psychologist Anders Ericsson's belief that steady improvement comes from immediate feedback:

You try something, it works or it doesn't, and you adjust accordingly. Surgeons quickly learn whether their work was successful. This idea of immediate feedback applies to many areas. Hit a golf ball and within seconds you know if it's a good shot. Cook a meal and the first bite will tell you if it sucks.

In both fields, people can rapidly improve their skills through frequent practice. The immediate feedback allows you to continuously tweak and perfect your techniques. You quickly learn what works and what doesn't.

But what happens if you don't receive legitimate feedback until years or even decades after the fact? And what if all along you are receiving what looks like feedback, but might just be mixed signals? How can anyone be expected to improve? That's the story of investing.

Take Meta's recent financials for example. The company has poured billions into building the metaverse while the core business struggles. It could be feedback that the company has lost its way. Or it could be the price to pay for a visionary future plan. Without the benefit of hindsight, you don't know what matters and what's noise. Is one bad quarter enough feedback? How about one bad year? It's certainly not a golf shot.

The question is compounded by the fact that once you get the real story, you might have forgotten why you invested in the first place, further muddying the feedback loop. This is why documenting decisions is important for objectively assessing outcomes.

Imagine you bought a stock on the foundation of sound logic, and a year later interest rates are slashed and the company’s valuation skyrockets. You are not receiving accurate feedback that you made a good decision. What you thought was investing prowess was actually the result of secular tailwinds. Being convinced otherwise is a dangerous game.

Investing is a world with patchy correlations between process and outcome. Luck and skill intertwine at every corner. A hot stock can become a dud if valuation excesses correct. Even entire investment styles may enjoy tailwinds that swiftly turn into headwinds (shoutout Cathie Wood). The link between process and outcome becomes clearer over long time periods, but it is still noisy.

There is no easy solution to this problem. It's why investing is hard. As a general rule of thumb, the longer the gap between process and feedback, the harder it is to improve. So when your time horizon is measured in decades not seconds, feedback suffers, making it an incredibly challenging learning experience.

It's like hitting a golf ball, except your shot doesn’t land for years. All the while you’re seeing countless shots land on the green and in the sand trap, unaware of which is yours. You start to see why there are so few Tiger Woods's in the investing world. The feedback loop is stretched out and clouded with noise.

Patience is the key to cutting through that noise. When investors are left to chart their own path through the long and winding road of market cycles and contradictions, surgeons will tell you it takes more than pedigree to navigate it.

-Sam

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