Writing down your reasons for making an investment should save you in your investing.
What you expect to make?
What you expect to risk?
The reasons why?
Always write down the reasons, pro and con, before making a purchase or a sale.
- Major successes in some investors were invariably preceded by a type of written analysis.
- Sudden emotional decisions have generally being disappointments.
- Writing things down before you do them can keep you out of trouble.
- It can bring you peace of mind after you have made your decision.
- It also gives you tangible material for reference to evaluate the whys and wherefores of your profits or losses.
Quality Not Quantity
I have seen many analyses, some involving many pages of information.
In practice, quantity doesn’t make quality.
There is invariably one ruling reason why a particular security transaction can be expected to show profit.
- Writing it down will help you find it.
- It will help you judge whether it is really as important as your first inclination suggests.
Are you buying just because something “acts well“?
- a coming increase in earnings or dividend not yet discounted in the market price,
- a change of management,
- a promising new product,
- an expected improvement in the market’s valuation of earnings?
In any given case you will find that one factor will almost certainly be more important than all the rest put together.
There will be a level at which you will decide that things have not worked out and where you will sell.
Your risk is the difference between your cost and this sell point; it ought to be substantially less than your hopes for profit.
You certainly want to feel that the odds as you see them are in your favour.
Much More Difficult: When to Sell
All this self-interrogation will help you immeasurably in the much more difficult decision: when to close a commitment.
When you open a commitment, whether it is a purchase or a short sale, you are, so to speak, on your home ground. Unless everything suits you, you don’t play.
But when you are called upon to close a commitment, then you have to make decisions, whether you see the answer clearly or not (analogy: being stuck on a railway crossing with the train approaching).
- You don’t know what to do -but you have to do something.
- Go backward, go forward – or jump out.
If you know clearly why you bought a stock it will help you to know when to sell it.
- The major factor which you recognized when you bought a security will either work out or not work out.
- Once you can say definitely that it has worked or not worked, the security should be sold.
One of the greatest causes of loss in security transactions is to open a commitment for a particular reason, and then fail to close it when the reason proves to be invalid.
- Write it down and you will be less likely to find yourself making irrelevant excuses for holding a security long after it should have been sold.
- Better still, a stock well bought is far more than half the battle.
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