One of human beings’ quirks is that we are attracted to action. We want something to always be going on. My kids will come to me and say, “I’m bored.” It is not a state they like, and they want me to fix it by conjuring up some exciting activity on the spot.
Thinking about your investing process is not all that attractive to most investors. It seems boring. “Forget process. Just point me in the direction of the next ten-bagger and I’ll be happy.”
Regardless of how we see the world, truth has a way of imposing itself. And the truth is that process is boring, but it is where you can arguably make the most progress as an investor, if you relentlessly focus on it. Over time you will get better, and your results will improve.
Buffett has rightly said that what an investor needs to be successful is a rational framework and the right temperament. He’s correct, of course. But too many stop there and spend, perhaps, too much time thinking about their investment philosophy and not enough time on their process.
Here are some questions that can help you improve your process:
1. How do you search for new ideas?
2. Is your search strategy robust, i.e. does it reasonably insure that you will not miss attractive investments within your circle of competence?
3. How often do you run your screens? Are you consistent?
4. Do you have preliminary filters in place – required hurdle rate, risk profile, complexity, un-knowability, etc. – to quickly weed out ideas and not waste precious research time?
5. When you do find an idea, do you have a well-defined research process or checklist that you go through, without exceptions?
6. Have you carefully defined your valuation methodology? How could you improve it? Do you have a required hurdle rate, and is it appropriate?
7. Do you have investment checklists to help determine if a business is good and if management is a worthy steward of your capital?
8. Do you have a cognitive bias checklist in place to minimize the risk of biased or faulty thinking when evaluating an investment?
9. Do you have a watchlist? Is it up to date? Is it a hodgepodge, or does it contain actionable stocks with pre-determined buy prices?
10. Do you write down your investment thesis, prior to pulling the trigger on a new investment?
11. How do you size a new positions? How many stocks do you hold? Are you a focused investor (Glenn Greenberg) or widely diversified (Walter Schloss)? Why?
12. Do you scale into new positions? Do you buy more when a stock goes down? Do you do this haphazardly or have you thought it through?
13. Do you hold cash and, if so, how much? How did you determine the amount? Does your hurdle rate go up as you cash holdings go down, i.e. do you become increasingly selective as your cash goes, for example, under 20%?
14. How do you monitor your existing holdings? How are you organized to stay on top of your investments? How could you improve?
15. Do you listen to conference calls and read the Q’s? Do you look for disconfirming evidence that challenges your thesis?
16. Have you defined your sell criteria? If you are a long-term investor, is there an over-valuation level at which you would sell? Do you figure it out ahead of time and mark it down?
17. Do you trade around positions – making partial sells and buys as your stocks become over or undersold? Why or why not?
18. Do you review your past mistakes? Do you record your lessons in a form that you can review and learn from?
19. Do you have a time when you regularly review your investment process – all of the above – and make a plan to improve it?
These questions are not exhaustive, nor are they meant to be. They are, however, more than sufficient to get you thinking about your own process and how to make it better. This is the path to beating the market.