Tue 29 Aug 2006
While thinking of underappreciated investment analysis techniques, I just thought of one that I freely admit to skipping: before making a decision about where to invest, write yourself a draft e-mail about why this stock/fund/etc is worth buying now. Jot down some bullet points about why, from the current perspective, the stock looks promising. On a weekly or monthly basis, review this e-mail to yourself and see if the situation has changed significantly and adjust your position accordingly.
For instance, let’s say your e-mail narrative states that purchased a stock because (A) it was trading below it’s 50-day moving average but just above it’s 200-day moving average, and (B) because it’s sector was performing in the top 10% of all sectors for the year, and (C) a news item about stock buy-backs just came out and tipped you off to look into this particular stock. This is useful information, since you bought the stock based on chart info, sector analysis and news. Now what happens when bad news comes out (CEO leaving unexpectedly, product recall, war) that affects your stock? One of the 3 major reasons you had for buying the stock is now in question, so this could count as a sell signal.
Taking the time to write out the reasons and then reviewing these once they are written is an excellent intellectual process. If possible, share your rationale with a significant other who shares in your investment choices success and failures. Additionally, this narrative serves as an instructional tool, allowing you to analyze your investment decisions later with clarity and not relying on your memory which could forget key details or confuse various investment decisions with one another.
Here’s some suggestions of things to write in your “investment hypothesis” email to your future self:
- Purchase target
- Selling target (include items like “if the stock hits __ in less than 3 months, sell 50% of holdings”)
- Upcoming catalysts that would push the stock higher/lower
- How the sector is doing
- How volitile the stock is
- Thoughts on the daily and weekly chart
- Current news items
- Anything else you’d like to add?
August 31st, 2006 at 1:34 am
I think you’re definately looking at the right approach, but instead of a draft email, consider a trading diary. I’ve kept a diary (in some form or another) for all of my trades recently. It helps immensely, and I highly recommend keeping one (regardless of the format — if a draft email works for you, so be it).
You need to decide to write in the diary for every trade, what to log/capture, how often to review, and whether you are planning your trade in your diary or not.
August 31st, 2006 at 9:18 am
I think both tracking ideas are good but I think, John, that the email idea has a unique impetus that is different from a diary. It more like “convince me”. It reminds me of how I used to study in college where I would find an empty classroom and teach a lecture to myself. If you can’t write an email explaining why you should invest somewhere, then you probably need to keep looking. Then the diary can kick in and you can use that to “plan the trade and trade the plan”.