|
Your 7-Minute Guide to Making Better Investment Decisions |
| Print | |
|
Investing, in its simplest form is about finding investment ideas, analysing companies and making decisions.
Your investment returns can thus be increased by improving any one of the three activities.
In this article I want to give you some ideas on how to improve your decision making. It is something I started a few years ago that has helped me immensely.
Give
it a try. It may not
only, improve your your investment returns but other areas of your life as well.
I have always been an avid reader of anything written by Peter Drucker (1909 - 2005). His ideas on business and management has always been miles ahead of current thinking.
At least once a year I try to read an article he wrote called Managing Oneself (Click on the link for a copy of the article) which is an excerpt from his book excellent book Management Challenges for the 21st Century.
In the article Peter describes a technique on how to discover your strengths through the use of feedback analysis.
"Whenever
you make a key decision or take a key action, write down what you
expect will happen. Nine or 12 months later, compare the actual results
with your expectations. I have been practicing this method for 15 to 20
years now, and every time I do it, I am surprised.
The feedback
analysis showed me, for instance-and to my great surprise-that I have
an intuitive understanding of technical people, whether they are
engineers or accountants or market research-ers.
It also showed me that I don't really resonate with generalists.
Feedback
analysis is by no means new. It was invented sometime in the fourteenth
century by an otherwise totally obscure German theologian and picked up
quite independently, some 150 years later, by John Calvin and Ignatius
of Loyola, each of whom incorporated it into the practice of his
followers."
I have successfully used this technique to evaluate and improve my investment decisions.
Each time I make an investment I write down the answers to the following three questions:
- What is my reason for buying?
- What is the security worth?
- How did I calculate this value?
Don't
write a long story just one or two lines. As I have found that, the longer the
reason for buying (the more complex the investment case is) is the lower my returns usually are. The simplest
investments arguments are usually the most profitable.
When I review the
investment in my portfolio, after a price decline or receipt of new information, I
look at the reason for buying. If the reason is no longer valid I
seriously consider selling.
Also when selling an investment I
refer back to the purchase decision and add the return on the
investment (in total and per year) as well as the reason for the profit
or loss.
Every six months I compare my decisions with the results.
A profit does not automatically equal a good decision.
A
good decision would be one where the reasoning behind the
decision proved to be correct. Was your thinking process
that led you to the buy decision correct?
For
example a profit
made through a completely unexpected buy-out of the company would not
equal a good decision whereas buying because you thought a security is
undervalued and then profiting from a buyout would be a good decision
(the undervaluation made the company an attractive buy-out candidate).
I urge you to give it a try, you will be surprised at your findings.
Here is for example what I found:
That
said I am still not 100% sure what my correct amount of research is. But
I am sure I am moving in the right direction. Using check-lists as I
described in the article What does your checklist look like? is a step in the right direction for me.
I
also add securities I have sold to to a virtual portfolio as I realised
that I often sell investments too soon. I review this
"sold" portfolio six monthly to evaluate the quality of my sell
decisions. I do this for only up to a year after the investment
has left my portfolio as thereafter the investment case may have
changes and I have stopped following the company.
This has helped my returns a lot as it has, objectively, confirmed my mistake of not letting winners run.
In summary
We make hundreds of decisions every day, some more important than others.
If the quality of important decision in our lives can be improved, even only slightly, it can make a huge difference.
This is of course also true of your investment decisions.
I
urge you to put a system in place to improve your decision making. It
will show great dividends in your life sooner than you would expect.
Like what you have read?
Sign up for our free newsletter and receive articles like this in your inbox weekly A
And if you sign up now you will also
receive a 11 page free report - Enhanced Checklist for Investors -
with over 30 proven checklist items to improve your investment
performance
Privacy Policy
I
am back in Hamburg and have acclimatized the the cold and dark here.
Today its -6C and snowing which is better than 5C and rain.
The holiday in South Africa was great but I am glad to be home.
Your analyst in the cold and dark wishing you health and wealth in 2010
Tim du Toit
Financial Calender - January - To Do list
Start the year with a fresh look at your net worth.
The
market over the last two years was quite a roller coaster ride. Take a
look at where you are today compared to one and 2 years ago and make adjustments.
Think about the following:
-
Do you have enough liquidity to cover expenses and any emergencies?
-
Are your retirement assets accumulating?
-
Is your total net worth increasing from year to year?
Your
net worth can only grow through positive investment returns or savings.
But in order to have anything to invest you first have to save.
I
have tried a lot of different methods to save money but the only one
that works for me is to save first and spend what is left. If the money is
gone you cannot spend it and your spending adjusts to what you have
have left.
Budgeting simply does not work. The problem
is that when you budget, you pay everyone else first -- the rent, credit cards, telephone and so on. And, despite
your best efforts, you end up with next to nothing to save.
Putting a system in place to save takes five minutes and runs on autopilot from then on.
Here are the steps:
-
Decide how much you want to save (10% of gross salary for example)
-
Open a separate account where the savings are to be paid into (a brokerage account for example)
-
Instruct your bank to transfer the amount you decided to save to the brokerage account the day after your salary is paid
-
Use the money in the brokerage account for
investments only. Any profits go straight back into this account accept
if you decided to treat yourself with a small portion of the profits.
That is all there is to it.
If you are not doing this already, give it a try. You will be amazed at the results.
Should you invest in great international companies or concentrate on the country you live in?
Why choose?
At Eurosharelab, our market-beating Alert Portfolio is currently invested in six international companies. These companies comprise the very best value opportunities we can find in our broad world of investing:
- French and German telecommunications companies paying dividends of more than 7%
- a small US branded consumer goods company with high profit margins paying a dividend of more than 6%.
- a US
natural gas company optimally positioned to profit from higher natural
gas prices with entrepreneurial incentivised owner managers
- a UK
based property company founded to profit from the meltdown of UK
commercial property prices with owner managers that have personally
made two fortunes already by investing in UK property
- a UK
automobile accident repair company unfairly sold down by the market to
absolute bargain price levels with a strong balance sheet paying a
dividend of over 6%
Click here to learn more
|
