Dear Fellow Investor

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 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 have always been miles ahead of current thinking.

At least once a year I 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.

Don't write a long essay just one or two lines. 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 compelling and 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 If the reason is no longer valid I seriously consider selling.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.

But be careful, 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:

• I am a very bad coat-tail investor i.e. buying a security because someone else bought it. I am uncomfortable holding the investment and tend to make bad sell decisions. Either too soon or too late, after a gain has evaporated.

• Also, if I do too much analysis on an idea I lose my objectivity. I tend to fall in love with the company and tend to see price declines as a reason to keep on buying. Something that has cost me dearly.

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? was a step in the right direction for me.

I also add securities I have sold 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 changed 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 in our lives.

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.

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Your deciding analyst


Tim du Toit