Investors must make decisions in an atmosphere of uncertainty, where the outcome cannot be known in advance.

Worse yet, investors are barraged with conflicting advice and philosophies, each clamouring for attention, competing for scarce investment rands, offering claims of superiority, and each holding out images of simple and mystical solutions to a complex problem. As they wrestle with this problem, investors often confuse strategy with outcome. That is one of their most serious and common mistakes. They will make far better decisions if they separate the two.

Investment strategy is forward looking. We develop a strategy because we wish to exert the most influence possible over an outcome not directly under our control. If you are delusional enough to believe you can see the future, you don’t need a strategy. I would give a lot for just one peek at next Sunday’s Business Times. Without that foresight, we need a strategy to deal with uncertainties.

Investment strategies should be developed from a sound foundation in financial economics and a comprehensive investment philosophy. The strategy must be tailored to the unique needs of each investor, considering his financial position, time horizon, attitude towards risk, and objectives. It must carefully consider opportunities for gain and ability to bear loss.

The best strategy is the one offering the highest probability of success, given that we cannot know the future in advance. It follows that the best strategy goes as far as possible to limit the chances of failure - however defined - and takes no more risk than necessary to achieve an acceptable outcome.

Outcomes are only known after the fact. Investment outcomes are generally crystal clear and can be clearly calculated. It is simple to compare outcomes over any given time frame. This certainty and precision often gives these outcomes additional weight in the investor’s thought process. But the quality of the strategy cannot necessarily be inferred from the results.

The next step in the thought process may be to equate the best outcome with the best strategy. They are not the same thing. For instance, suppose last year I took your entire family fortune to Sun City, placed it on red and won. Am I a genius? The results are better than 99% of the investment advice you may receive, but are you comfortable with the strategy? Would you hire an adviser who took that type of risk? If you didn’t understand the strategy, you might be pretty impressed. You might even recommend your adviser to all of your friends.

There is enough noise, variation, random drift and luck in the investment process to allow even a brain-dead strategy to sometimes produces great results. Chasing those results rather than putting them in the context of a rational strategy can lead to disaster. Somewhere in the world’s markets something "unusual" is always going on. There are "winners" who took concentrated risks and won big. That’s not necessarily genius. Nor is it likely to be consistently repeatable.

We need look no further than technology stocks in the last half of the ’90s. The sector produced great results but carried immense embedded risks that could easily have been avoided. Investors who confused those results with an appropriate strategy learned a brutal lesson. Concentrated sector investing carries huge risks that have no additional expected returns. This uncompensated risk is foolish to bear when a much lower-risk market solution is available. Beware of falling into this trap.

Conversely, even a brilliant strategy cannot guarantee continuous stellar results. Diversified portfolios looked pretty anaemic from 2003 to August 2007 compared to pure SA equity. Failure to deliver remarkable, unsustainable results may be interpreted as a failure of strategy. It is not until the embedded risks inherent in concentrated positions manifest themselves that diversification gains its deserved respectability.

Occasionally, an active fund outperforms its index. That does not mean active management is superior to passive investment. The active manager may have a good outcome next year, too. Each time period is a separate event and some active funds will, on balance, win the loser’s game. A few win again over long periods.

But identifying them in advance may be problematic. Implementing strategy demands a long-term perspective and discipline. The market will not deliver assumptions year after year just because an investor adopted a reasonable strategy, or even a great strategy. Focusing on strategy is the only rational route to success.

Outcomes, especially short-term ones, contain so much noise they are almost useless as a guide. Whether the short-term results have been good or disappointing, investors must look beyond them to fabricate the best strategy to deal with tomorrow’s needs. The knee-jerk comparison of outcomes to strategy confuses luck with genius and leads to chasing last year’s winners in the hope that tomorrow will be like yesterday. It rarely is.