How do good investors become “ace” investors, and then stay that way? Experience has a lot to do with it. But so does one key habit — seasoned professionals often keep a regular investment diary.
Over time, such a practice will help you understand your mistakes, and be increasingly aware of how your emotions work against you.
What is an investment diary? “Every day, you write down what happened in the markets and what you did,” says Jeffrey Saut, chief investment strategist at Raymond James. “I have notes on the markets back to the 1960s.”
He sends out a daily newsletter to clients, which makes his thoughts on the investing environment public. Saut says his diary includes movements in the Dow Jones industrial average, the Standard & Poor’s 500 index and the Nasdaq composite, how many stocks were up and how many were down. He also records how many stocks made new highs and lows.
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These items, and others, provide you the investing backdrop. “If you write that stuff down every day, it makes you look at it,” Saut says. And because you look at it, you start to better understand what’s going on.
Investing rationale. Another part of the equation is how an investor makes decisions in any given environment. The diary needs to have a record of investments made and the reasons behind those investments, as well as the investments considered and rejected.
“What is important is that you record what you do, and what you don’t do,” says Philippe Couvrecelle, founder and CEO of London-based iM Square.
Making a record forces an investor to think more critically about the reasoning behind any market move. And the record provides a useful reference in the future.
“If you face the same decision one or two years later, then you can see if things have really changed,” Couvrecelle says.
Do you remember what commodities did in 2012? An investor’s diary would include an entry for any new position taken in commodities in that time, including market conditions and the reason why the commodity was purchased at a specific price.
By now it would also be clear that such an investment was a losing decision. The Thomson Reuters/CoreCommodity CRB commodity index started 2012 above 300 and reached a low of 157 earlier this year after the price of oil, gold and other materials got crushed for years on end.
A good investor is dispassionate. That gets to the next role of the investment diary: learning to be dispassionate. It can be hard, but one investor has a way to start the process.
“Take out a dollar bill and put it on the fridge under a magnet,” says Vinny Catalano, global investment strategist at Blue Marble Research in New York. “Then every time you pass that dollar say ‘I love you’ — and you’ll see that you don’t get a reaction.”
Every investor has to learn to become dispassionate about the investing decision, Catalano says. “If investing is about feeling good then you aren’t doing it right.”
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One of the common problems for most investors is that they get attached to an investment idea and stick with it, even when it should be clear that it was a mistake — like a 2012 bet on commodities.
What Catalano, and many others, does is quickly realize that the trade or investment isn’t turning out as planned, and then get out.
Saut made a bullish call on stocks late last year but quickly realized he was wrong. He wrote about it in his newsletter and got out. This is common for talented and seasoned investors: they make bad calls from time to time. But they don’t hold on to them.
That’s what separates the professionals from the rest of us.
So how do you start? Catalano says begin the process of keeping an investment diary without using real money. Instead record so-called paper trades. Paper trading involves writing down how many shares of a stock you would buy at the market price, and the reasons why. No money is moved.
“It forces you to live the investment, by writing it down and measuring how it feels to win or to lose,” he says. “Then you can consider what you might have done differently.”
[See: The 10 Best Energy ETFs for an Eventual Bounce.]
That learning process can be a long one. No investor is immune from bad trades, but the process of journaling helps build confidence to start investing with real money.
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How to Keep an Investment Diary originally appeared on usnews.com
