You can’t learn how to invest by just reading a book.
But you can get started with a pen and paper.
Journalling is one of the most underrated ways of becoming a successful investor.
Documenting your investment moves sounds simple but it is far more important than you think.
As humans, we tend to misremember our past experiences especially when it involves major events.
On this note, the past three years have been full of challenging episodes that can distort our memories and directly impact the lessons we learn.
Therein lies the issue.
If you remember the wrong things, you will draw the wrong conclusions.
Even worse, you will be applying these wrong lessons in the future over and over again.
This is why journalling plays such an important role.
The right way to view your wrong moves
Keeping a journal does more than just help you remember the past.
Your personal diary should keep track of all your investment decisions, and become a useful reference in the future for any good or bad decisions you made.
Making sure you learn the right lessons is critical.
Let me explain.
Statistician Dr. Simon Ramo once made an interesting observation about tennis: professional players win by hitting winning shots. Amateur players, on the other hand, win by committing fewer unforced errors.
Likewise, if you are beginner investor, you should focus on cutting down on mistakes.
Unforced errors are common in investing, but they are not easy to spot.
The performance of a stock in the short term does not always reflect the quality of our decision.
We may have made a good choice, but the stock price may still go down. Conversely, we may have made a bad choice, but the stock price may still go up.
The better way to measure your improvement would be to focus on your investment process.
Author and professor Michael Mauboussin homes in on a key difference between processes and outcomes in his book “More than You Know”, summarised in the enclosed diagram.
|Good outcome||Bad outcome|
|Good process||Deserved Success||Bad Break|
|Bad process||Dumb Luck||Poetic Justice|
Source: Derived from Michael Moubaussin’s book, More than You Know
Looking at the difference between process and outcome, you would expect a good investment process will lead to a good outcome (“deserved success”). Likewise, it’s only fair that a bad process leads to an unfavourable outcome (“poetic justice”).
Yet, there are times when your investment process is sound but the end result is not what you desired (“bad break”).
This scenario, while less common, could be more prevalent amid turbulent market conditions.
Don’t be mistaken by your mistake
When it comes to judging whether an investment outcome is good or bad, time is a key factor.
The last three years have provided plenty of examples as to why we should give businesses enough time to show their worth.
Time can make a big difference between a positive or a negative result.
For instance, we have seen pandemic darlings such as Zoom Video (NASDAQ: ZM) and Peloton Interactive (NASDAQ: PTON) soar in 2020 on the back of sky-high demand only to see their growth disappearing post-pandemic.
On the other end, shares of Mastercard (NYSE: MA) and Visa (NYSE: V) initially declined over fears of falling revenue. Fast forward three years later, and both shares are touching new highs, buoyed by the return of travel and cross-border spending.
In short, judging Mastercard and Visa as failures in 2020 would have been premature.
A time frame of at least five years is ideal before you make any conclusions on the success or failure of your investment moves.
Given this requirement, you will need help in remembering your thoughts from years ago.
That’s where keeping a good journal plays a vital role.
Starting by putting pen on paper
You can start your journal by taking notes whenever you buy a stock.
To get you warmed up, noting down the following six points will do wonders for your future learning:
- Recording down the stock you bought
- The share price you bought
- The date you purchased the stock
- Why you bought the stock
- The stock’s valuation
- The risks you identified
Always think about how the information you jot down today will help your future self.
For instance, if your stock does well, was it for the reasons you noted down in the past (point number four in the list above)?
Be honest with yourself.
If the answer is yes, then your success is backed by a sound investment process or ranks as a “deserved success” in Mauboussin’s process-outcome framework.
Conversely, if your stock fell short of expectations, were you able to discern the potential risk ahead of time (Point 6 in the list above)?
If you were blindsided by the risk, then it is a good lesson for the future.
On the other hand, if the answer is yes, then your investment process is still working, but it was simply a “bad break” in Mauboussin’s parlance.
The key here is to take notes that will either help you determine whether your investment process is working or to provide insight to where there are steps or criteria which are lacking.
Stress testing your process
If you want to take journalling to the next level, then consider recording the stocks you considered but chose not to buy.
In this case, write down what attracted you to the stock, and why you decided to pass it over.
Here’s the critical part.
Once you write down the details above, set a timer to check on the stocks you did not buy. Again, make sure there is sufficient time (say, five years) before you make a judgement on whether it was the right decision to not invest.
Even better, compare the performance with the stocks you bought around the same timeframe.
If the stocks you did not buy do better, ask yourself what you missed.
Could the winning factor be seen ahead of time?
More importantly, could your investment process have excluded a potential winner? How can you improve your steps or criteria after learning this information?
Again, there is only one person you have to answer to — that’s yourself.
Get Smart: An ode to lifelong learning
Nobody is born with investing smarts.
Even the best investors in the world, including Warren Buffett, have made mistakes along the way.
The key is to learn from your errors and avoid repeating them.
Becoming a great investor is the process of steadily becoming better at your craft, occasionally stumbling along the way, but always looking to improve yourself.
That’s why keeping a journal is such an important tool in the investor’s arsenal.
The act of taking notes can help you track your decisions, outcomes, and lessons learned.
And it’s easy to get started.
All you need is a pen and paper. So what are you waiting for?
If you can commit to being a lifelong student, I submit that you will increase your chances of becoming a great investor.
Note: An earlier version of this article appeared in The Business Times.
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Disclosure: Chin Hui Leong owns shares of Mastercard, Visa and Zoom.