One of the best things you can do as an investor is to audit your investment decisions.
This is an underrated factor that can help improve as an investor.
Very few investment books ever mention this crucial aspect of investment. But all successful investors practice it.
Reviewing past decisions is helpful, because it can help you identify recurring patterns, misses and opportunities. By identifying problems and opportunities, and addressing them, the investor can improve over time.
It’s important to take a step back, and try to think clearly about what you are missing. It’s hard to take a look at yourself, and see issues. Growth is painful, but worth it.
Of course, in order to have something to evaluate, you have to have those decision points in handy.
In my case, I have a process I follow. But I also have a lot of write-ups, behind each decision.
I also have transaction histories as well. I also have write-ups and population data.
After doing some reviews and analysis over the years, I have found a few interesting tidbits.
Notably, when it comes to stock analyses, I’ve noticed that the best opportunities basically jumped at me. The data was so convincing, that it just spoke to me. However, if I had to spend a lot of time explaining away why an investment is great, despite the data, I was mostly justifying an average decision.
In addition, I had found that selling has been one of the worst decisions I could make. Early on, I was pretty active in my portfolio. I would buy a security at a good value, and then sell it at what I believed to be a high price. I would then re-deploy funds in what looked like a cheaper security. It’s also likely that I was subconsciously engaged in yield chasing as well. What ended up happening is that that “expensive company” I sold turned out to do very well, growing earnings, dividends and intrinsic value. The cheap company I bought turned out just okay, but nothing spectacular. Even worse, I ended up paying taxes on gains in the taxable account. I learned that once I buy a good quality company, I should pretty much sit tight on it, and do nothing.
This has further been reinforced by studying my mistakes. A lot of times, compounding is not a straight line upwards. There could be times where a security may be going through some temporary bumps/slumps/noise. This is when everyone gets discouraged. Notably by share price going nowhere, which is when media articles start popping up saying that the stock is not working. That’s noise, but it does wear you out if you pay attention to it. It’s even worse for someone with followers online, because everyone asks you about it. It’s death by a thousand cuts. I have learned to ignore and just stick to it. It’s because long-term investing is simple, but not easy. But in most cases, these consolidation phases tend to wear out the weak hands that never make it in investing. By the time they capitulate, the stock is hot again and “works”. Selling because you are impatient is a mistake.
In general, selling a stock has been a mistake for me. It has been compounded by the fact that the company I replaced it with tends to do worse than the company I sold. It happens all the time, at least 40% – 60% of the time. But the magnitude of missed economic opportunity is larger than the opportunity I replaced it with.
Being patient with a security provides the maximum opportunity to let compounding do the heavy lifting for me. That doesn’t mean sticking my head in the sand. But it also doesn’t mean just getting scared easily either. It also doesn’t mean never selling – but being extremely careful about why you sell.
These days I rarely sell. The main reasons are a dividend cut and because a company has been acquired. Any other reason to sell has largely been a mistake, on average of course. I would encourage you to review your transaction history, and determine if selling has been a mistake over your investing career.
