If you are an investor your worst enemy is you. We all doubt ourselves, or do things without putting in the proper work, or make impulsive decisions without a plan. Many of the professional investment books written by professionals with successful track records address this topic, since it’s the hardest aspect of investing to conquer. Monish Pabrai and Guy Spier are examples that discuss the topic and present ideas of how they have reduced the chances of second guessing themselves or their process of selection. Monish goes as fast as only placing a buy or sell order when the markets are closed. With so much data and opinionated news stories on media all investors are faced with these challenges. The good news is there are ways to help reduce your behavioral actions with regard to investing.
In my opinion the first step is knowing how to narrow the field of choices of companies you would like to invest in so you can whittle away at a reduced list until you find the companies you ultimately would like to invest in. For me it has to be products or services I use as a primary focus. I can at least understand what they are selling and why it’s a good start. For others it can be a defined stock screener list where the characteristics that are being screened for don’t change too much. The next step is to develop a checklist of items the company has to meet in order for it to work. For me one of the first questions that I ask is if this company will be relevant ten years from now. If it passes this test then I move on to the numbers or financial statements to determine value and see how well the business has been doing in the past with consistency being a good sign in this category. For me a business that is consistently growing its earnings yearly and it’s profit margins aren’t being reduced shows that it is of value to consumers.
I have a lot of items on my check list with my main goal of trying to keep it simple. It is easy to start questioning everything and micro investigate a business, but at times I think this can be defeating to a good possible candidate. For me in the past I have missed good opportunities because I got too micro on my investigation where the issue I may have discovered through my research wasn’t that detrimental to the businesses growth in the long term. The other problem is your check list can get way too long and causes you not to want to spend the time doing the research.
I boil it down to one big question, would I invest every dime of what I have into the business in its current condition, with the current management, and at the current price? Taking the choice to this extreme helps me to determine how good of investment at the current price the company is to me based on the research I have done. It also helps me decide how big of my investment pie I want this company to become or if I would rather walk away. Your ultimate goal when you narrow your choices down is to find an investment where you would be happy to be a large owner of that company for many years to come. You have to know the business you are investing in that well. When you take this approach you will ask yourself the tough questions.
Finally, you are going to make mistakes. Everyone does even the professionals. Buffett and Munger have as well as all the rest of them. If you treat your mistakes and failures like puzzles, and when you solve them next time around they become golden nuggets that make you wiser. No matter how good you get at investing you will still be your worst enemy and question yourself, your process, and your decisions. This is why the element of reducing your risk with value investing is so powerful. If you take this approach you reduce your risk exposure verses chasing the next hot stock so you can sleep at night.