Wednesday, September 5, 2018

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.
  1. 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?
  2. 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.
  3. 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.
  4. Read the work of at least one other analyst.  Compare what you see against what they see.
  5. 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!

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