To many, investing is a complicated affair. It might involve numerous spreadsheets, some complicated graphs, and a whole lot of numbers. To many, investing is a complicated affair. It might involve numerous spreadsheets, some complex graphs, and a whole lot of numbers. But it doesn’t have to be this way. Investing can be kept uncomplicated too. One way is to simplify the way we invest. Take the humble notebook. It’s easy enough for anyone to get a little book that slips into our hip pocket and yet, it can be the most important thing in an investor’s toolkit. But that’s…
To many, investing is a complicated affair. It might involve numerous spreadsheets, some complicated graphs, and a whole lot of numbers.
To many, investing is a complicated affair. It might involve numerous spreadsheets, some complex graphs, and a whole lot of numbers.
But it doesn’t have to be this way. Investing can be kept uncomplicated too.
One way is to simplify the way we invest.
Take the humble notebook. It’s easy enough for anyone to get a little book that slips into our hip pocket and yet, it can be the most important thing in an investor’s toolkit. But that’s only if we put it to good use.
If we come across a business that looks interesting, we can use our notebook to record our thoughts. We can write down the reasons why we like the business and the growth potentials that we can see. We can also jot down the potential risks that might derail the business. If we want, we can even record the stock price and valuation numbers.
Writing down our thoughts about a business is about as simple as it gets. But it turns out that the act of documenting our thoughts is also crucial if we want to be good at investing.
Let me explain.
1. Lying to ourselves – click here
2. What have you done for me, recently?
Another reason to keep notes is because of something that psychologists call “recency bias”. Author and financial journalist Jason Zweig covers this bias in his book, Your Money and Your Brain, citing the findings of neurobiologist Paul Glimcher:
“As Glimcher’s findings show, whatever has happened most recently will largely determine what you think is most likely to happen next.”
Recency bias can affect the way we invest. When we think about the bad things that could affect a business in the future, we tend to put more weight on recent events. Consequently, we might forget about the strengths of a business.
That behaviour could be detrimental to our investing results.
For example, let’s take a look at the trials and tribulations of Jardine Cycle & Carriage (SGX: C07). In April 2014, shares of the vehicle distributor were trading as high as US$49. By early October 2015, the shares had fallen to below US$27. There were plenty to worry about as the shares tanked.
Jardine C&C’s Indonesian subsidiary, Astra, was hit by weak commodity prices, a fall in domestic consumption, and higher competition in vehicle distribution. And that’s not all – Jardine C&C’s results were further decimated by a weak rupiah. Jardine C&C’s share price decline could well be a sign that investors were ditching the company on the back of its recent results.
But investors who had their eyes glued to the 2015 results may have missed the forest for the trees.
Astra had still been maintaining the widest vehicle distribution network in Indonesia, even as the local economy faltered. Case in point: Astra was able to maintain its 50% market share in 2015, even as the number of cars sold declined by double digits.
The stable market share was a possible indication that the Astra’s strength in distribution was still intact.
As the Indonesian car industry recovered, Astra was able to grow alongside, and even increase its market share in 2016. As its stands, shares of Jardine C&C are now back to around US$40.
A Foolish conclusion
We could have been reminded of Astra’s strengths, as the shares fell, if we had kept notes.
We can always look back at the reasons why we bought into a business to help defeat recency bias. This simple act will remind us of the competitive strengths of the business that we had noted down in the past. It also helps us figure out whether the strengths have suffered any permanent damage.
I hope the above example shows how the simple act of documenting your thoughts on a business — in an equally simple notebook, no less — can help you become a better investor.
Another way that you can simplify it is to have someone do all the hard work for you. At The Motley Fool Singapore’s premium stock recommendation service, Stock Advisor Singapore, we provide comprehensive reports for each and every stock we recommend.
These reports could serve as the notes on a company’s strengths and weaknesses that I have mentioned earlier, and help make you a better investor - in addition to providing you with investing ideas!
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.