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Thursday, August 14, 2008

Is investing like dieting?

OK, so the title of this post is calculated to make you say "Wha..?" But there is actually a similarity that is worth talking about.

Recently, there has been a study released on dieting. The study emphasizes that those people who write down every single thing that they consume are much better at controlling their eating habits and actually losing weight. By documenting their true eating habits, these dieters have a much better idea about what exactly they are eating, where they are giving in to temptation and allowing fattening foods into their diet and where they are accomplishing their goals by eating the right things at the right times. And by tracking their weight as they document their eating, they are forging a relationship between input and output, cause and effect. Thus, they are better able to modify their behavior.

The study determined that those dieters who rigorously wrote down what they ate were better able to lose weight and keep it off compared to those dieters who did not follow the same process.

This reminds me of one of the investing techniques that is often overlooked. There are a number of investing guides that recommend that investors document their trades in detail. This means to write down their reason for buying the stock, the price at which it was bought, their reason for selling the stock, the price at which it was sold, commissions and the profit or loss.

The important aspect of this approach is to keep track of the reasons for buying and selling. Only in this way can an investor know WHY they made money or lost money.

There are so many questions that can be answered by using this technique. Is your system, if you have one, working? Are you following any kind of rules for buying and selling? When you bought that stock, what was your profit expectation and why? What was your exit strategy and were you able to stick with that strategy? Are you consistent in the way you execute your trades? If you vary your reasons for buying a stock, which approach yields the best results? If you vary your reasons for selling a stock, are you selling too late, too early or right on time?

What it really comes down to is common sense. You can't improve something if you can't measure it or understand it. All investors want to improve their results. The only way to understand your results is know how precisely you obtained those results. Only then can you adjust your approach to repeat the processes you followed when the results were beneficial and avoid the approaches that led to losses.

For those of you who have downloaded the TradeRadar software, be aware that under the Portfolio menu item the "Individual" selection opens a screen that allows users to do exactly what we have described above. There are text boxes for recording the reason for buying and the reason for selling, entries to capture purchase price and selling price, commissions, number of shares, etc. Profit or loss is automatically calculated.

If you are looking to fatten your profit margins, try keeping detailed records of your trading as described in this post. This should allow you to develop the discipline and consistency to profit more often.

1 comment:

Sandra Ahten said...

Learn How can we make healthier dieting and weight control a source of pleasure instead of duty?

The Reasonable Diet - http://www.reasonablediet.com , is the motivation you need to move into action to achieving and maintaining a healthful weight.

This is not an off-the-shelf or ""cookie cutter"" diet. You get the motivation and skills needed to adjust your diet week by week, so that as your life and schedule changes your diet can easily change also.

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