Over time, every investor will inevitably make their own fair share of investing errors, and possibly suffer some losses. The mistakes could be due to unforced errors on our part, while at other times, share price losses could be due to unforeseen factors going against our best intentions. Despite this sobering fact, the crucial moment is an investor does after the mistake is made. If the Foolish investor can learn from their own investing mistakes, they could come out better for it. But how can we best learn from our past errors? The decision making journal This is where the Head of Global…
Over time, every investor will inevitably make their own fair share of investing errors, and possibly suffer some losses. The mistakes could be due to unforced errors on our part, while at other times, share price losses could be due to unforeseen factors going against our best intentions. Despite this sobering fact, the crucial moment is an investor does after the mistake is made. If the Foolish investor can learn from their own investing mistakes, they could come out better for it.
But how can we best learn from our past errors?
The decision making journal
This is where the Head of Global Financial Strategies at the Swiss bank Credit Suisse, Michael Mauboussin can help. In an interview with the Chief Executive Officer of the Motley Fool, Tom Gardner, Mauboussin went into fair detail on what investors can do to improve their own performance. I would like to share this insightful excerpt below about keeping an investment journals:
“Many years ago when I first met Danny Kahneman, and Kahneman is one of the preeminent psychologists in the world who won a Nobel Prize for economics in 2002, even though he’s never taught an economics class.
When I [asked] him what is a single thing an investor can do to improve his or her performance, he said almost without hesitation, go down to a local drugstore and buy a very cheap notebook and start keeping track of your decisions. And the specific idea is whenever you’re making a consequential decision, something going in or out of the portfolio, just take a moment to think, write down what you expect to happen, why you expect it to happen and then actually, and this is optional, but probably a great idea, is write down how you feel about the situation, both physically and even emotionally. Just, how do you feel? I feel tired. I feel good, or this stock is really draining me. Whatever you think.
The key to doing this is that it prevents something called hindsight bias, which is no matter what happens in the world. We tend to look back on our decision-making process, and we tilt it in a way that looks more favorable to us, right? So we have a bias to explain what has happened.
When you’ve got a decision-making journal, it gives you accurate and honest feedback of what you were thinking at that time. And so there can be situations, by the way, you buy a stock and it goes up, but it goes up for reasons very different than what you thought was going to happen. And having that feedback in a way to almost check yourself periodically is extremely valuable.”
The hindsight bias which Mauboussin referred to was also covered in Jason Zweig’s book “Your Money and Your Brain”. Zweig is an award winning financial columnist for the Wall Street Journal. In his book, he noted down several traits of hindsight bias:
“Highsight bias is another cruel trick your inner con man plays on you. By making you believe that the past was more predictable than it really was, highsight bias fools you into thinking that the future is more predictable than it ever could be. That keeps you from feeling like an idiot as you look back — but it can make you act like an idiot as you go forward”
In short, Zweig suggests that the vast majority of people are prone to distort and misremember what they formerly believe. For instance, there might be folks who want to believe that they saw the recent oil price rout coming, however a quick search on the internet reveals otherwise. Just in June 2008, a newswire report entitled “Why the Oil Price Keeps Rising” – detailed multiple reason on why oil prices will continue to keep rising. Perhaps, the newswire didn’t get the oil price memo from last week (and couldn’t!). It is more likely that few people saw oil prices falling.
Keeping a decision-making journal helps to keep us honest to our own investing errors made, and limits the influence of hindsight bias. This can be done in a variety of ways, from writing down the thesis for our investing decisions, or reversely, writing down why we chose not to buy certain shares. As we move forward years from now, checking back on our journal of decisions made in the past might well reveal sobering facts about our own blind spots. Crucially, it will also allow us to act more wisely in our quest to beat the Straits Times Index (SGX: ^STI).
In other words, there will be times where we have no control over the circumstances that turn unexpectedly against our investment thesis. But, with the decision-making journal, we have control on how we improve from there.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.