How can an investor quickly realise that his investment was good or bad?

Posted By Scott Philips On Wednesday, December 21st, 2016 With 0 Comments

It’s actually very simple. You make your investment plans BEFORE you buy, and stick to them. You absolutely have to have a plan for what would make you change your mind.

If you are a fundamental investor investing in a growth stock you might “hold the stock until earnings growth has peaked”

If you are a startup investor you might hold until “burn rate indicates under 12 months left of life”

Your decision might be chart based. “I will sell the shares if it makes the lowest price in any 23 month rolling period”, or “I will sell the stock if it declines 15% in value”.

Best practice is to figure out what makes you think this is a good trade or good investment, and figure out what condition, price, or series of events that invalidates that prior opinion.

It is essential that we do this before we invest, because it becomes emotionally painful to see conflicting evidence once we commit, so we have a strong cognitive bias towards ignoring views that disagree with our own.

Share Button