Practice – Nobody is perfect but you can aim to get better

This post is part of a series on The Virtuous Investor written by Joachim Klement. Let’s face it, we all make mistakes, both as investors and in our lives. There is no shame in making mistakes, but there is shame in not wanting to get better at whatever you strive to do. If you want to be a great painter, you better paint as many paintings as you can. The first few are likely going to be rubbish, but over time, your skills will develop, and you will get better at it. Does that mean you are going to be the next Leonardo da Vinci or Pablo Picasso? Probably not, because these painters had an exceptional amount of talent that only very few people have. But that talent needed to be exercised and practised before it could come to full fruition.

What is true for artists is true for investors as well. We all have to practice investing in order to get better. And just like most artists never will be as good as Leonardo, so too will most investors never be as good as Warren Buffett. But you can at least strive to become the best investor you can be. There is one crucial difference between artists and investors. While we can choose to become an artist or not, everyone is forced to become an investor, whether they like it or not.

The practice is a necessity for investors, but unfortunately, practice is only half the ticket to better returns. The other half is to learn from past mistakes. And unfortunately, this is where most investors fail miserably. As investors, we tend to forget our past mistakes and remember our past successes.

The virtuous investor is aware of this faulty financial memory and uses techniques to record investment decisions and learn from mistakes. The simplest technique Klement knows of and uses are investment diaries. In an investment diary, you record every investment decision you make with three short bullet points:

1.     What decision did I make?

2.     Why do I think this investment is going to make money?

3.     What could go wrong?

These three bullet points in your investment diary give you a picture of your thinking. After a while (and Klement recommends doing this regularly) you can review past decisions and your thinking at the time. This way, you will start to understand where you made mistakes in your investment decisions and learn to avoid these mistakes over time. Klement admits that it is a long and tedious process that will improve your investment performance only gradually, but as with almost all things in life, there are no shortcuts.

Becoming a good investor not only takes years of practice, it takes years of deliberate practice which means not just doing things, but systematically reviewing past actions to learn from past mistakes and build on past successes.