09:52 pm
August 18, 2017

The 1 Thing You’re Probably Not Doing That Could Make You a Better Investor

The 1 Thing You’re Probably Not Doing That Could Make You a Better Investor

This cheap item could be the key to better investing returns.

By Jamal Carnette

Investing is both exhilarating and frustrating at the same time. That can’t-miss investment quickly falls by the wayside, while a company you expected to underperform becomes the hottest investment of the decade. Even the smartest Wall Street tycoons have a few investment decisions they’d rather forget.

The key to being a successful investor is to learn from your mistakes. Unfortunately, many investors are stuck in a cycle of underperformance because they fall into the trap of committing the same mistakes repeatedly. The best way to recognize negative behaviors is to keep an investing journal. Here’s a framework for a successful journal.

It starts with an investing thesis

Before buying any investment, it’s essential to start with an investing thesis. Fellow Motley Fool writer Daniel Sparks outlines the four broad tenets of an investing thesis:

  • Starting broadly, I ask: What are the big macro trends impacting this company and its industry?
  • How is this company poised within this trend?
  • What makes this company enduring (or not)?
  • Based on these developments and situations, what is the specific reason I believe this company is (or is not) worth its current price? (The answer is my thesis.)

Additionally, and equally as important, investors should address the risk side of the investment, and key metrics that support or rebut their theses. Here are a few additional questions I recommend before investing:

  • What metrics should I monitor to ensure the thesis is correct?
  • When do I admit I’m wrong?
  • What outlet or individual formed my opinion on this investment?

Update consistently, and consult before you sell

The second stage is to continue to monitor the metrics listed above to ensure your thesis remains intact. In addition to looking at earnings press releases, read or listen to the company’s conference calls to see if management’s plans are similar to your expectations for the company going forward.

Additional metrics, like market share and unit sales, are often provided by third parties periodically. Record this information in your journal; integrating it into your investment thesis should provide insight into company performance.

There’s another reason an investing journal helps investors. Codifying the underlying metrics you use to evaluate an investment helps control emotions. When the financial media is promoting the next “financial crisis” (remember Brexit?), informed investors can avoid the knee-jerk reactions that can cause subpar performance. Before you sell any investment, review the journal to ensure the decision is being made in the context of your investment thesis – not short-term emotions.

Learn from successes and mistakes

After selling the investment, or even after holding an investment for a significant time frame, investors should evaluate the overall process. Did the thesis hold? Were the metrics an accurate representation of the company’s competitive position? What could I have done differently going forward? These are the key questions that should be reflected upon after selling an investment.

Another thing investors should do is evaluate the idea’s source: If you have gotten the last five stock suggestions from your part-time investor, part-time-conspiracy-theorist uncle, and they’ve all underperformed the market with no thesis coming to fruition, it’s probably time to look to new sources for investing ideas.

You may have noticed this process is remarkably similar to the scientific method. And that’s the point: The scientific method has been the backbone of knowledge acquisition and deductive reasoning dating back to Aristotle. It makes no sense to abandon the scientific method with your investments.

In the end, though, keeping a journal, and applying the aforementioned framework, will not make you the next Warren Buffett, but it should make you a better, more-focused investor. And that can make a huge difference to your financial well-being over the next 10-20 years.

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