Here at GuruFocus, we spend a lot of time talking about the attributes that good investors possess, as well as different metrics and frameworks they use to analyze companies. But a topic that tends to be less covered is the question of how to improve your own investing process. As such, I want to take this opportunity to reflect on what investors should be doing to become better at investing.
Keep a journal
When I was a trainee on a trading floor, one of the things I was required to do was keep a meticulous record of all my trades. This meant taking note of things like where I put a position on, where I took it off, how long I was in the trade, my profit or loss on the trade, what the market was doing at that time and what my state of mind was while doing so. Moreover, I was encouraged to use screen-recording software so that I could review my actions at a later date.
It was tedious, but I quickly realized there was a good reason for what I was being asked to do. By keeping a record of my actions, I was able to pinpoint exactly where I had made mistakes and improve on my process. I also quickly found out it was much harder to convince myself that a loss wasn’t my fault when I had video footage of me compounding my errors (like most novice traders, I had a tendency to let losses accumulate instead of cutting them).
Now, while day-trading futures contracts is obviously very different from value investing, investors can also benefit from keeping a journal. In it, you should list the reasons for why you bought a stock, what price you bought it at, what price you intend to sell it at (either to take profits or to cut losses) and what your analysis of the company is. You should also make a note of your mental state, the time of day and other such information.
Human beings have a tendency to rationalisz their own failures and mistakes. How many times have you blamed being late on traffic (despite the fact traffic is the same every single day)? This is very natural - and sometimes healthy - no one wants to feel bad about their actions, or to be racked by self-doubt because of some minor mistake that happened a month ago.
In investing, however, this tendency can blind us to our own weaknesses. We blame losses on unforeseen events, nefarious shortsellers or plain old bad luck (but never attribute our gains to good luck).Ă‚
Keeping a journal makes it a lot more difficult to rationalize failure in this way. But it’s not just about holding yourself accountable - though that is also important. It’s about identifying your own weaknesses and shortcoming. Maybe you find yourself stepping outside of your circle of competence because you are easily seduced by a good narrative. Or maybe you can’t resist buying cheap stocks that end up being value traps. Whatever your weaknesses are (and we all have them), journaling will help you pinpoint them. Once you are armed with that information, it is much easier to make adjustments to your process and become a better investor.
Read more here:
- Warren Buffett: Reading Will Make You a Better Investor
- ”‹Warren Buffett: Areas Don’t Make Opportunities, Brains Do
- The Value Investor's Handbook: Value Traps
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