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How a simple notebook can make you a better investor

Jul 04 2018 15:04
Simon Brown

One of the key points of a successful investor or trader is the process of notetaking. 

I am an almost obsessive notetaker and have filled over 20 journals over the years with my investing ideas, and many times that number with my trading notes.

Something I find very important – which is backed up by research into student notetaking – is that while we can do all this notetaking on an electronic device, I find the process of writing with pen and paper makes me think much better, and I also retain the information better.

When we take out a notebook, our brain knows what we’re going to be doing and the process of actually writing embeds it into our brain. 

Being off an electronic device also means no email or social media pop-ups trying to drag us away from thinking and writing.

What I have started to do in the last decade or so is digitise my hand-written notes into PDF so they’re easier to store, and while old trader journals will be tossed out, I have kept every investing journal dating back to the mid-1990s.

My process is that when I start investigating a potential investment, or when I am reviewing an existing investment, I’ll write down every thought before eventually summarising them down to a single page. 

Ideally, this page will consist of three positive points on why I like the stock and three points that I consider to be risks to the stock. 

It is important that we dig into and write down the risky points as well, otherwise we’ll suffer from confirmation bias, believing the company we’re researching only has good points. No company has 100% good points.

What I then do is revisit my notes on a stock I bought every six months when results come out and again at my annual year-end review process. 

I will add and adjust the notes as required, but try not to tweak my positive points too much.

If I am constantly changing the three key reasons I like a stock, then I would worry that the reasons were not strong enough, and that maybe I have erred in making them my key reasons for investing. On the flipside, I am happy to change the risk points as I consider this being up to date on the changing risks to a company.

What I also do is go back and review the notes from stocks I did not buy. This may seem silly, but it has two very important uses. Firstly, maybe I decided not to invest in a stock that ended up being a massive winner. 

I don’t beat myself up over this; we can’t own all the winners. But I am always digging to see what I missed. I also like to check my notes on stocks that I did not buy that were great decisions because the stock either underperformed or crashed. 

Here, for example, my 2012 notes for Steinhoff concluded with two points:

- Balance sheet confusing


- Can’t reconcile the net debt

These two points were enough for me to stay away from a then much-loved stock and for years it looked like I was wrong. But we know how that ended.

But then my notes on Clicks got it totally wrong when I concluded with:

- Legislative risk on medicine pricing


- No competitive edge on product range


- Weak acquisition strategy (Musica)

Point three was right in that Musica was a dying brand, but the error was that it did not translate into further weak acquisitions. I also learnt single-exit pricing did not kill the pharmacy industry and we’re better off ignoring insiders who moan about new rules threatening their businesses. Lessons learnt.

This article originally appeared in the 5 July edition of finweek. Buy and download the magazine here or subscribe to our newsletter here.

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