Process Beats Emotion

We can write an entire library about what drives our firm, and one of our great joys is discussing (and occasionally debating) it with current and potential clients. However, not everyone has the opportunity to spend a few hours together talking about it.

Instead, we took a lesson from the old adage, “brevity is the soul of wit,” and limited ourselves to three words. After a thoughtful effort, we are excited to share our firm’s new tagline:

Process

We start with Process. At Cornerstone, process is an essential part of our firm and embedded throughout everything we do, from stock selection to organizational design.

Many clients have a key question: “How do I trust you to do what you say you will do?”

This question is the critical one to ask any investment manager. We believe that we have built every aspect of Cornerstone to ensure that we do what we say and say what we do. This cannot change over time; it must be consistently employed. It is an inevitability in investing that there will be both periods of outperformance and periods of underperformance. But investment philosophies and processes only work over time when they are executed with discipline and consistency. We must ensure that decisions at all levels focus on the long view and are not diffused by the myopia of the market. We have designed our firm, from its ownership, to its decision-making approach, to its hiring policies, to ensure that we consistently do this. It is our embedded characteristic.

Emotion

On the other side, we compare that to Emotion. Investors are, by their very nature, emotional. That means prices in the market, itself made up of many independent investors, is also driven by that emotion. Instead, Cornerstone’s investment philosophy, that “stock prices are more volatile than the fundamentals which determine value,” reflects that we seek to exploit the emotional and behavioral biases that drive suboptimal decision-making among investors. Some of these biases include the following:

• Confirmation bias, where information that agrees with their hypothesis is worth more
• Endowment bias, where stocks already owned are worth more than stocks not owned
• Anchoring bias, where the first piece of information learned is worth more than future information

Similarly, we believe the most significant stress on a manager is the urge to change their process during periods of underperformance. This often leads to breaking the very element of the investment process that has made a manager successful over longer periods of time.

Which one is likely to lead to long-term success? A robust and thoughtful process with 20+ years of sustained and consistent execution, or a collection of cognitive and emotional biases?

To us, it’s simple: Process beats Emotion.