The Importance of Having a Stock Selection Process

There is a good editorial in this month’s edition of the Sharewatch newsletter. As was emphasised by our coverage of stock picking systems in the last ShareSoc newsletter, the key is to have some system, and some discipline, when selecting stocks. This is the time of year when the media are publishing their “naps” for the new year and when many investors are looking to refresh their portfolios by getting rid of last year’s duds and picking new ones. This is some of what the Editor of Sharewatch had to say on this subject:

“If you don’t have a process, don’t kid yourself into thinking that your (hopefully outsize) returns in 2015 were due to skill. This is a trap that many investors have fallen into over the years. A good year, and rising confidence, often triggers poor decision-making in the following year – generally over committing, not adequately diversifying, over-trading. 

The New Year is a good time for an honest self-appraisal, and the laying out of a game plan. Write it down. For example…..What is my process for buying? How often will I review purchases? By what criteria will I review them? What will trigger a sale at that review? What are the circumstances under which I will sell between reviews (e.g. stop loss)? Or will I manage risk by having a large cash buffer?” 

These are wise words indeed. How many times do you look back at investments that have generated poor or negative returns and ask yourself “why did I buy this” and cannot recall. It can often seem a very odd decision. But if you have not recorded why you bought it then you will not learn from your experience.

The New Year is a good time to adopt a process, and a more disciplined approach, if you do not have them. Otherwise the tendency is to follow the crowd, pursue the latest hot “tips” and generally act in an emotional way which is a sure way to obtain poor returns. Reading the latest ShareSoc newsletter would be a good place to start to learn how to go about things in a new way as it contains several articles on stock picking. You can obtain a free sample of it if you are not a Member by putting a request into the ShareSoc contact page – see http://www.sharesoc.org/contact.html

Roger Lawson

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