When it investing, it helps immensely to have these three tools in your arsenal — an investing journal, a watch list, and an investing checklist.
As I was reviewing my investing journal this week, let me share with you the reasons for this practice.
Peak-End Theory
The peak-end theory was shared by the Nobel Prize-winning Israeli psychologist Daniel Kahneman. His definition is as follows:
“The peak-end rule is a psychological heuristic in which people judge an experience largely based on how they felt at its peak (i.e. its most intense point) and at its end, rather than based on the total sum or average of every moment of the experience.”
Cognitive biases alter our memories as our brain cannot remember every minute detail of our experiences. It finds ways to efficiently process the many data points encountered at any given time.
As a way to prioritize our memories, our brain tends to create highlights. It does this by applying a cognitive shortcut to focus on memories on the most intense aspects of an experience and what the ending is like, omitting the full range of experiences (i.e. you forget most stuff other than the peak and ending) in the process.
The implication of this is that we forget most of the full suite of experiences and thoughts when investing. Much of what makes an investor successful is the ability to develop a framework for making decisions, especially during times of maximum pessimism and the ability to keep emotions at bay.
Here is what Warren Buffett has to say:
“If you have a 150 IQ, sell 30 points to someone else. You need to be smart, but not a genius,” Warren Buffett is often quoted as saying. In fact, Warren Buffett places more emphasis on rationality and emotional stability. “Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ. Rationality is essential,” says the Oracle of Omaha.
Warren Buffett notes, “To invest successfully does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding the framework.”
Having an investment journal allows you to revisit your thoughts and evaluate your past decisions. This helps with forming your decision-making framework over time.
This is essential to continuously improve as an investor and allow us to learn about ourselves, and how we could better manage our emotions.
As Adam Smith famously said “If you don’t know who you are, the stock market is an expensive place to find out.”
It’s important to quickly learn about oneself, and not continuously repeat the same mistakes. A journal provides a reference point in the future to look back on where my thinking went awry.
Peter Lynch 2-Minute Drill
I approach my investment journal similar to Peter Lynch’s 2-minute drill. The rationale is to find out if I really understood the business. A good litmus test is the ability to explain my thesis clearly and concisely.
Writing it down forces me to slow down and really think things through.
Generally, I will briefly write about the business model, why the business will become bigger and more profitable in five years, how it compares to other opportunities out there, and what the risks involved are.
Keeping My Emotions in Check
Other times, I write about my emotions in investing. As you can see from my entry on 23 March 2020, as the stock market went on a roller coaster ride.
I used the journal to jot down my immediate thoughts and emotions. This helped to clear my mind and capture my emotions on paper for evaluation.
This helps me make better judgement amidst all the noise and flurry of emotions.
Final Thoughts
As with anything, sustainability is key. You don’t have to write an elaborated essay or in perfect sentences. This journal is for you and you only, to help you become a better investor by providing you the opportunity to revisit and study your thoughts/ decisions.