If experience is the greatest teacher, then learning from it is critical. Periodic evaluation should be a staple for every investor.
At least, it should be, if your goal is to make money.
Bernard Baruch realized this early in his career after losing all of his money several times and his father’s money too.
I developed a habit I was never to forsake — of analyzing my losses to determine where I had made my mistakes. This was a practice I was to develop ever more systematically as my operations grew in size. After each major undertaking — and particularly when things had turned sour — I would shake loose from Wall Street and go off to some quiet place where I could review what I had done and determine wherein I had gone wrong. At such times I never sought to excuse myself, but was concerned solely with guarding against a repetition of the same error.
Periodic self-examination of this sort is something all of us need… The more we know of our own failings the easier it becomes to understand other people and why they act as they do.
Also, human nature generates its own inertia, which lends to keep us moving in whatever direction we have started. It is always wise for individuals…to stop and ask whether we should rush on blindly as in the past. Have new conditions arisen, requiring a change of direction or pace? Have we lost sight of the essential problem and are we simply wasting our energies on diversions or distractions? What have we learned that may help us to avoid repeating the same old errors?
Of course, nothing that Baruch did is groundbreaking. But it does require some effort and honesty.
It starts with evaluating your reasons behind an investment or strategy. Preferably it’s something with substance. To paraphrase Peter Lynch: If the reason is it’s going to go up, then you’ve found the problem.
The reason behind any investment or strategy needs to be cogent and written down. Keep it simple and answer some basic questions. Why will the investment work out? What’s the position size? How much do you expect to make? How much are you willing to lose? Write it all out. The good, the bad, your worries, and the why’s.
You can take it a step further by including a pre-mortem. Assume the investment failed miserably and give the reason why. The benefits are three-fold. First, every investment has a downside. A pre-mortem forces you to think about it. Second, it may uncover risks you hadn’t thought about. It might be reason enough to rethink how much money you want to risk. And last, overconfidence and excessive optimism toward new investments are common. Anything that balances that out is helpful.
What’s the benefit of all this writing? It’s a reference point for every investment. It’s something to look back on when markets go crazy or when your mind tries to revise history. It’s a record of what you thought at the time and why every investment sits in your portfolio.
The writing comes in handy when you decide to audit each investment. Has anything materially changed for the better or worse? Is the reason for owning still sound? Is the time horizon different? Have the risks changed? Would you still buy it today? Or has it changed enough to warrant selling?
The point is to compare your early notes against what you know today to decide if an investment is still worth owning. Keep in mind, investing is not about being right, it’s about not digging yourself into a deep hole and making it harder to make money.
The writing gives you a chance to audit yourself against the outcome. If you’re being honest with yourself, patterns will emerge in your decision-making that cost you money.
Baruch found two errors he repeated often. First, he didn’t know the company as well as he thought. He didn’t understand the business, the management, the direction the company was going, or where earnings would come from.
His second mistake was he left himself no room for error. He regularly bet everything he had, on margin, and lost it all.
Both mistakes were fixable to some degree. He began to avoid investments he didn’t truly understand and kept a cash reserve in case things went horribly wrong.
Baruch’s “self-examination” changed how he invested for the better. Limiting his common mistakes improved his performance.
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