Wednesday, January 26, 2011

Non-Buy Follow-Ups

Some time after you've purchased a stock, you probably have a pretty good idea as to whether you made a good decision or not. This is because you likely follow the stocks you have purchased fairly closely. This feedback mechanism allows you to fine-tune your stock purchase criteria so that you don't make the same mistakes again. But often, some of the best lessons to be learned come from the stocks you didn't buy, but considered buying!

Unfortunately, investors often forget about these stocks. These stocks don't make it onto their "follow" lists or spreadsheets, and have zero mind-share. As a result, they may never know if their thesis was correct. Not utilizing this potential feedback mechanism for a large number of stocks can prevent one from becoming a better investor.

Consider cataloging the stocks you were close to buying, but didn't. Check back to see if the reason you didn't buy came true. Note that for individual stocks, the result might be misleading. For example, a risk you foresaw may not have come to fruition, but may have been a legitimate reason for not buying. Looking at this "non-portfolio" in the aggregate and over several years, however, should help you improve your decision criteria.


Investments said...

While this is a very wise idea, its probably good only for disciplined investors.

What you're suggesting will likely move emotional investors to pull the buy trigger on these watch-list stocks AFTER their value proposition is lost, i.e. after the discount fades away as the stock pops.

Watch-lists should more often trigger investments after a precipitous drop. Learning from an alarming gain in a stock one had considered buying, but didn't buy, likely will lead even the most disciplined investor to cause mistakes like selling his losers and directing those funds to this winning horse which he never placed original bets on.

Summary - wise words, insanely hard to follow.

Anonymous said...

FTP comes to mind!!!!