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Making Great Investing Decisions

Posted by: Brian Dennehy
Membership level: Free
Knowing how to make great decisions can be the key to living a happy and successful life, as well as saving you time, money and stress. It’s one of the best skills we can develop, and especially when it comes to investing.

I want to try and answer the question “what does a great decision look like?” and more importantly, “what does a great investment decision look like?”.
The first problem
Change is hard. You want to improve the results of your investing. You cannot do this if you carry on doing what you currently do – something must change – surely, we must accept that. 
But change is hard. Change creates uncertainty, and we hate uncertainty – that is hard-wired into all of us.
The second problem
Bad decisions sometimes have good outcomes, a particular issue with investing. As markets are going up most of the time, you can follow a variety of spivvy tips or new launches or a “best buy” list with no known rationale, and there is a decent chance you will make money. The problem here is that investors then kid themselves into thinking that this is a process – the reality is that they are massively under-selling their potential.
Where to start?
Start by acknowledging that if you (we) can make better decisions it saves time and stress – and you make more money.
Accept that sometimes even good decisions can produce bad results. It is impossible to have a perfect process which caters for all possibilities and variables in a complex world.
Accept that change is hard, and a new process will be hard work at first – but with practice you will make that decision very easily in the future.
You won’t improve your knowledge by looking at an outcome. But you will if you immerse yourself in the decision which preceded it – cut it open and dissect the entrails. 
For example, imagine I am a 100 metres sprinter with a best time of 9.9 seconds. The guy I want to beat at the next event can hit 9.7 seconds
So my training target is easy. Aim to improve on 9.7 seconds. Right? Wrong.
Aiming for 9.7 seconds doesn’t inform how I am going to train.
What I need to focus on is the detail of my day to day training – the process.
In particular I must discover if there is something about my competitor’s process which gives them an edge. If I get that process right, I create the possibility of improving on their 9.7 seconds.
Without focussing on that training process, my chance of success is limited, and any success is more by luck than judgement. This is where many investors are stuck.
The message from your current portfolio? Luck or process?
Your portfolio’s success will be the sum of the investment decisions you’ve made over many years.
Have your portfolio in front of you now. As you look down each holding:
  • Try and recall your reason for buying each holding…
  •  …was there a process?
  • Are there common reasons or processes across the portfolio?
  • Which were just luck?
It is very important that you recognise luck, because if you can’t you will never be in a position to review and correct the way you are making decisions. And eventually your luck will run out, painfully.
You probably have one or two holdings that have done particularly well. The risk associated with these ones is that you kid yourself into thinking that you have some special skill or insight, which you are far more likely to do if you did not have a process.
It might also be the case that you did have a process, but you didn’t think of it in those terms at that time – with hindsight this might be more obvious. In which case allow yourself a big pat on the back, because you clearly have some good investing instincts. Now you need to formalise that process – write it down, component by component. These are the entrails. Now you begin to learn, and you can clearly see what can be improved.
The entrails
What are the components of a “great decision”? What are the essential elements?
  • Know your objective, but do not obsess about it e.g. more growth, more consistently?
  • The objective sets the direction of travel
  • Establish the necessary facts e.g. a process which works, supported by a volume of evidence
  • Apply that clear and repeatable process
Persistently remind yourself that;
  • a great decision is not judged by a single outcome
  • the more often this decision is made, the easier it is to make in the future
  • the more often this decision is made, the greater the compounding benefit
Daniel Kahneman – The Nobel Prize winning author of “Thinking, Fast and Slow” that I quote many times in my book “Clueless - tells us that the best way to improve our decision-making is by recording our decisions in a decision journal.
If you don’t track your decisions you are less accountable for the decisions you make, less self-critical, and over-confident in your decision-making ability.
In contrast, your “investing decision journal” will be made up of accurate and honest detail on your thinking at the time you made the decision.
From this you can gain the feedback you need to make better decisions. If you can review your decision journal every six months or so (you could even tie it in with your six-monthly fund review), you will get much better at your investing decisions.
Realizing where you made mistakes, how you made them, which decisions you’re typically poor at, or good at, will be valuable information to help you make better ones in the future and ultimately be more efficient, less stressed… and wealthier!

Topic: Market commentary


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