Five Tips on Making Your Investment Decisions More Rational
The brain should be blue, don't you think?
It's difficult to keep emotion out of investing. Even as a skilled analyst, you may react emotionally to news or market fluctuations. You may have sentimental favourites or companies you hate.
My point is, we've all been there. We've all made an investment error due to emotion.
So, how can we get better? Here are five ideas to help make your decisions more rational.
Analyze with a peer group, even if you are only interested in one company. A peer group will give your analysis results context. Some questions you can answer through peer analysis are - do these debt levels make sense? Is this valuation reasonable? Is this profit margin unusual?
Don't begin with the end in mind. This means don't look for reasons to make an investment or recommendation, you'll find them and likely ignore contrary signals.
Once your analysis is done, as a thought exercise, ask yourself how it could be wrong, what you might have missed and what other information could change your decision. Assign probabilities to the scenarios you identify.
Read the work of at least one other analyst. Compare what you see against what they see.
Once you've acted, revisit your decision on some basis, annually or so, and repeat your analysis. Confirm that the factors that drove your decision are still present.
Consciously building the framework for rational investing will not only give you better results, it'll give you the confidence to ignore market fluctuations, often the catalyst to emotional reactions.
Thanks for reading!
P.S. We're going to take a deeper dive into probability in a later article. Stay tuned!
If you work with your own investment models you likely use excel to build them, but excel
isn’t ideal for many reasons and it costs you in other ways.
First, you need good data and it isn’t just lying around in
an easy to import format.You’re either
keying it in yourself or paying money for excel downloads.
When you need data from numerous sources – price
information, data from different statements and across multiple years - you
must merge it from multiple sheets. It's an inefficient process which can lead to data corruption.
After all this data is collected and merged, models built
and tested, the net result is one statistic for one company.A stand-alone number without context has
limited use.To be meaningful, you need
to compare it to similar companies.
This is just a sample of the challenges. You need software that overcomes
these problems and is designed for investment model creation.
Surprise! This software exists, it's INVRS. You can get a free analysis report on …
NextEra had good results relative to a group of peers in a factor-based analysis.NextEra has an appealing profitability and income profile.Its price momentum looks decent, with a caveat.Its relatively small size (a small mid-cap) coupled with its industry (renewable energy) further weight the odds that this company could be a strong performer in the future.
The Analysis Overview
I created a portfolio of stocks in the alternative energy sector, looking specifically for companies with a market cap over $1B but less than $4B. This is a sweet spot that offers strong potential for growth but is also substantial enough not to be too speculative.
It's my believe that alternative energy is on the ascendance, where as fossil fuels will inevitably decline (NextEra isn't a pure play in this regard however, natural gas assets are part of its portfolio). If you share this belief and you want exposure to this market, NextEra looks like a good bet.