The first decade of the twenty-first century was a rough one for investors. The total return for the S&P 500 for the decade, if one had reinvested all dividends, was negative 7%. After accounting for inflation, this figure drops to negative 27.5%.1 A decade is not a short period of time and memories of the financial crisis were still raw. The fact that the S&P 500 had rallied by 26.5% in 2009 was a welcome development but hardly offset the negative sentiment that was still widespread as we entered a new decade.
On New Year’s Day 2010, I remember feeling disgusted with the performance of my portfolio in 2009. My 5.7% return was pathetic compared to the sharp recovery of the S&P 500. Although my overall results for the past decade far surpassed the negative return of the S&P 500, 2009 was my first year managing my investments on a more-or-less full time basis. I have written about my mistakes during 2009 on other occasions. The bottom line is that I traded too much, remained bearish for too long, and often felt the need to “do something” when I would have been better off doing nothing at all.
What’s even worse is that I could not dissect the decisions that I made in 2009 which is what I wanted to do as I sat down at my desk on New Year’s Day. I wanted to understand what was going through my mind when I made decisions but I could not do so because I failed to keep any sort of organized investment journal.
Here’s a sample of three decisions I made in 2009 with an unknown rationale:
- Why did I purchase Johnson & Johnson on June 15 and then sell on August 31?
- Why did I purchase Microsoft on July 30 and again on August 4 only to turn around and sell those positions on September 14?
- Why did I purchase Wal-Mart on June 1 and then sell on September 14?
These are just a few examples of decisions that I made where I cannot recall the rationale, other than to examine my spreadsheets for stocks that I purchased around the dates of sales and make inferences that I liked one stock better than another. The three examples above all resulted in moderate profits and, knowing my psychology at the time, I probably wanted to “lock in” my gains. It’s embarrassing to think about and even more embarrassing to write about, even with the distance of fourteen years.
As 2010 dawned, I came to the conclusion that if I wanted to improve my returns, I would have to improve my process. At the very minimum, I needed to know exactly why I made decisions and this needed to be recorded in written form. Memories are simply too fallible and prone to retroactive modifications as time passes.
While I traded too much, I was far from being some crazy day trader with thousands of positions. My records show that I made twenty-nine purchases and sixteen sales during 2009, so I was trading less than once per week, on average. As a longtime shareholder of Berkshire Hathaway and a follower of Warren Buffett and Charlie Munger, I was aware of the stupidity of my actions in 2009 and determined to improve.
Since I’ve always kept very detailed spreadsheets, my solution was to simply add my investment rationale directly to rows of the spreadsheet documenting purchases and sales. In addition, I started to create short documents for any major decision. This formed the basic structure of an investment journal. I started this practice in 2010 and have kept it up over the past fourteen years.
While my results since 2010 have been much improved, I still made plenty of cringeworthy decisions. One of the worst, in retrospect, was that I sold my position in Microsoft in 2012, with the final sale on March 29, 2012 at $32.52. This was clearly a very poor decision in light of Microsoft’s performance over the past eleven years and the position was a significant one, enough to have made a big difference if I had held.
But at least I can go back and understand what was going through my mind when I made that fateful decision on March 29, 2012. Here are my unedited comments made on the day of the sale. The analysis is embarrassing, but not nearly as embarrassing as having to say that I have no idea precisely why I sold:
Made several updates to Microsoft valuation model over the weekend of March 24-25. The baseline valuation was lowered to ~$29 from $32 and the aggressive valuation was lowered to ~$37 from $40. The assumptions that were changed pertained to lower expectations for growth in the Windows/Windows Live and Business divisions due to an assessment that margins are very likely to be pressured going forward as a result of increasing importance of the tablet form factor. Microsoft is going to have to aggressively price Windows and Office to gain any traction with Windows 8 in the tablet market given the $500 price point of the iPad. With the iPad component cost at around $316 even with Apple’s huge scale advantages, HW vendors attempting to push Windows tablets are going to face significant obstacles even with discounted software pricing from Microsoft.
The liquidation of the position was based on an assessment that the future for Microsoft is unlikely to resemble the past in terms of revenue growth of the OS/Business divisions and margins. Perhaps buying an iPad has had an overly negative influence on my thinking here … but even BEFORE buying an iPad and understanding the power of the tablet form factor, my baseline IV was $32 – around the current price. Even the upside of $40 was insufficient given the risks to the investment thesis. Previously planned to sell into a rally in even increments from $35 to $40 but decided to simply liquidate now even at the risk of losing out on future gains — no current plans for deployment of proceeds.
My decision didn’t look bad for a while. The stock price fell and did not consistently exceed my selling price until April 2013, and the stock was again available around my selling price in September 2013 before beginning the ascent that we are well aware of.
Although I had no immediate plans for the proceeds when I sold, my records show that a portion of the funds went into Markel in May 2012, adding to a position started in early 2011 that produced very good market-beating results for my portfolio for over a decade. Of course, the results paled in comparison with “what might have been” but at least I have a relatively coherent accounting of my decision making at the time.
One of the most important principles inexperienced investors overlook is that one must separate the quality of individual decisions from the outcome of the decision.
This might seem counterintuitive, but it is very true. It is quite possible to end up with profitable investments that were the result of poor decision making or to find oneself nursing losses on investments that were the result of solid decision making. A good investment process is not guaranteed to result in profitable investments every time. Blind luck can generate great results occasionally. Over long periods of time and over many decisions, one hopes that a good process will produce good results.
Keeping a good investment journal is the only way to understand why you made the decisions you made at a point in time and, perhaps more importantly, to understand whether good and bad results were due to good or bad decisions. If you do not have an investment journal today, my advice is to start one immediately for any new decisions. For existing positions, document why you own the position as of today and, to the best of your recollection, why you purchased the investment to begin with.
One interesting supplement to documenting my investments has been my morning pages journal. Over the past four years, I have written down my stream-of-consciousness thoughts first thing in the morning, preceded only with pouring a cup of coffee. I write what’s on my mind before I even look at my phone or do anything else that could prove to be a distraction.
Morning pages are not intended to have anything to do with money and investing, and I almost never go back to read what I wrote on a given day. However, on more than one occasion, I have gone back to a specific entry. One reason to do so is when I go back to an investment decision made on that day and want to understand my overall frame of mind on the day of the decision and perhaps the day before.
During the early days of the pandemic, my morning pages journal is filled with anxiety but not much of the anxiety was about money. I was worried about the health of vulnerable family members and the impact of lockdowns on local businesses. In more than one entry, I comment on the fact that I had plenty of cash reserves and faced absolutely no near term economic pressures even as stocks were plummeting.
On April 2, 2020, I made a couple of significant investment decisions that I documented in my spreadsheets and, thankfully, those decisions have proven to be both intellectually sound and very profitable. My morning pages entries reinforce my recollection that I was not under duress. The fact that I was not under financial duress at the time allowed me to make investment decisions without worrying about where next month’s rent or grocery bill would come from.
Over the past several years, I have made far fewer investment decisions than I did in the dark days of 2009 as well as during the early part of the last decade. Back then, I felt internal pressure to made decisions to justify the fact that I was a full time investor. I no longer view myself as a full time investor and, as a result, my need to “take action” is dramatically reduced. My results have improved. I have made fewer decisions, but the decisions I made have been better decisions. An investment journal is an essential tool that I credit with convincing me that I was trying to do far too much and that less is often more when it comes to long term investing.
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- I used two websites to estimate returns, both of which are based on data available on Robert Shiller’s website. The calculators I used provided identical results using input parameters of December 1999 and December 2009. The calculators can be found at https://dqydj.com/sp-500-return-calculator and https://ofdollarsanddata.com/sp500-calculator.