I’m often asked by new investors about my biggest investing mistake. If you’ve been in the game as long as I have, then the list of mistakes to choose from will be enormous. Having said that, most of my early and stupidly repeated errors can be traced back to a lack of basic record keeping.
Anyone who has dabbled in technical analysis or charting, will be aware how important it is to keep a trading diary to understand their system’s strengths and weaknesses. While it may not be so obvious fundamental, value and even growth investors can also benefit from the same record keeping procedure.
Misconception
Many investors mistakenly believe a rise in share price is proof that their decision to invest was proven correct. Rather than share price, investors need to judge success on whether the company has performed as they predicted it would via growth in sales and profits when they first decided to buy.
While this is not an exhaustive list I suggest the points below should form the back bone of data collected for each and every investment. Software such as FileMaker Pro would prove very useful for such an exercise and will enable reporting at a later date.
| Investment Diary Form |
|---|
| Company Name |
| Market Cap |
| Sector |
| What does the company actually do ? (15 words or less) |
| What is the current PE? |
| Your prediction for PE in 12 and 24 months? |
| Historical PE (suitable for more mature companies) |
| Current EPS |
| Your Forecast EPS (12 month/24 month) |
| Cashflow positive ? If not ,when do you expect it will be? |
| Debt level |
| When will the debt mature? |
| What is the company’s gross margin on sales? |
| Does it pay a dividend? |
| If yes, what is the payout ratio? |
| How did you find this company? |
| Percentage away from 52 week high? |
| Management |
| What percentage of the company does management own? |
| Does management have a good record at forecasting future earnings ? |
| Does management over or under promise ? |
| Other |
| Did you consider 2 opinions that disagree with your thesis to buy ? |
| Did you consider 2 opinions that agree with your decision to buy ? |
| What is the over riding reason you’re buying? Cheap? Industry tailwinds ? Management? |
| Frame of Mind |
| Do you believe the ASX is over or under valued ? |
| Do you believe the DOW is over or undervalued? |
| What are your feelings about the market? Calm or volatile ? |
| How are you feeling about your last investment? Positive or Negative ? |
| How volatile has the share price been over the last 3 years? % up and down |
| Are you prepared to stay the course if it has the same volatility over the coming 3 years? |
| What is your price target? |
| Will you sell or reassess when it hits your target price ? |
Conclusion
As I stated above, this list should not be considered the beginning and end of your investment recording keeping. Each investor will look at a particular company in a different way and should tailor their check list to suit. As an example if I was investing in the resource sector, I would include the commodity price along with at what point in the commodity cycle I believed it to be.
As the years pass by on your investment journey, patterns should start to emerge in regard to your strengths and weaknesses.
While keeping investment records will not guarantee success, it is designed to help new investors become more methodical in how they approach each new investment and should help minimize many common and often repeated investing mistakes.
Do you have an opinion on what records an investor needs to keep? I would love to hear it!
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Disclosure:
Please Note: None of the above should be considered investment advice. These are my own opinions based on a number of years market experience. Please do your own research and consult a qualified financial advisor if you wish to invest.