There is no doubt at all that I have shared these two strategies I’ve used over my investing career, already. But they are so darn important to success that they absolutely bear repeating. So I thought it would be worth starting the year with the two insights I think can make the most difference for every single investor, whether they be beginner, intermediate, or experienced.
1. Set the buy price of all your stocks to zero in your brokerage account
This one is so simple and easy, you should do it now. You need to curate the information coming into your brain, if you want to have your best possible investing psychology.
That means, when you listen to someone speak, you need to know if they are a bad investor who loses money and pumps anything they own, a good investor who tries to understate bullishness out of caution, or an unknown quantity whose ideas should be taken on their merits, but tested.
Similarly, if you constantly look at your profit or loss on a given stock, you will start to feel a certain way about it. A stock that is up you might find yourself liking more, and become reticent to sell, even when you should. On the other hand, a stock that is down since you bought it and is showing red when you login, might cause you psychological pain.
That means, you might actually be incentivised to sell the stock simply because it is down from your arbitrary purchase price. Because that would mean you would no longer see the losing position when you log in to your brokerage. You’d feel better, but would it be the right decision?
The point here is that for a long-term investor, the price you paid for a stock is only relevant because of what it tells you about your skill in predicting the short-term price movements. Of course, if it is down 20% since you bought, you’d prefer to have waited.
Now, in extreme cases (like minus 50%) I do think there is some signal here. Perhaps you have missed some important information.
However, most of the time, the exact price you paid is not relevant to a sensible assessment of the investment prospects going forward. Seeing this information every single time you log in will certainly start to have some subconscious effect.
I believe too much mindfulness of this information is, on balance, actually harmful, and the optimum state is to essentially forget what price you originally paid for a stock so you can focus more fully on the value (or lack thereof) on offer today.
So one small, easy step you can do is to set the purchase price for all your stocks to zero, so as to deprive your brain of the price you paid for each stock.
2. Review your performance in detail to increase self-awareness
We don’t want to be bombarded with our profit and loss every time we login, but we do want to learn from our past successes and failures, because these can teach us something about ourselves.
I personally believe that one of the most common personality traits of successful investors is a thirst for self-knowledge. Self-awareness is so important because it helps you minimise repetition of mistakes and make changes where necessary.
Success is rarely attributed to self-awareness, but the lack of self-awareness on display from unsuccessful investors gives a hint at its importance.
For example, one fund manager I follow (as a contra) has produced a negative return for their investors over the last five years, and less than 1% per year over ten years. Their since-inception returns are also well below an index fund.
This fund manager barely lets a week go by without publishing his opinions on some stock or another. What you rarely see is an underperforming fund manager stop sharing stock tips and start reflecting on how they themselves could become a better investor. And yet, I believe that is the kind of self-awareness that can best help minimise mistakes and maximise opportunities.
For example, some people might be really good at buying and riding the ups and downs of businesses that have lumpy revenue growth and high operating leverage. This could open them up to buying shares in volatile businesses that might trade cheaply despite having good prospects over the longer term, because that particular investor iscapable of holding on through a bumpy ride.
On the same theme, I’ve learnt over the years that trusting the humans in charge is a particularly important point for me. Any kind of mistrust at the outset (and I am slow to trust) can mean that I am too quick to change my mind, even when I should continue to trust.
That means that even if I pick the right stock, I might not profit from it, because my lower conviction in management prowess will mean that I myself am prone to sell on bad news (when inevitably the stock is down). We’ve seen with a few examples of me choosing the worst moment to sell, for this exact reason. Perhaps the most stark and painful example in recent years is my sale of Codan (ASX: CDA) shares in 2022. Mea culpa, what a doofus!
That’s a lesson that I’ve had to learn too many times. And maybe I’ll never grow out of that flaw completely, but I’m sure going to try to, because I believe we cannot seriously improve without self-awareness, and we cannot stay ahead of the curve, in the long-term without continual improvement.
Finally, it is probably worth mentioning that this is one justification for using services like sharesight. You can’t appraise your performance in your brokerage account because it does not show sold positions, and you don’t want to see your performance every time you login, anyway. Sharesight solves this by seperating your performance and tax reporting activities from your trading activities.
Do you monitor a watchlist of stocks? You can use InvestorPA to get instant email alerts for every ASX announcement (for the stocks you select).
Save time at tax time: If you’d like to try Sharesight, please click on this link for a FREE trial. It saves heaps of time doing your tax and gives you plenty of insights about your returns. If you do decide to upgrade to a premium offering, you’ll get some discount (the best deal available, I’m told) and we’ll get a small contribution.
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Disclosure: The author of this article does not own shares in CDA and will not trade CDA shares for at least 2 days following the publication of an article specifically containing new opinions about those stocks. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. A Rich Life does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.