Start investing with an investment scrapbook

Over time, this investment scrapbook becomes a kind of veritable guide that you can fall back upon.

Sep 29, 2020 10:09 IST India Infoline News Service

What do we understand by an Investment Scrapbook? To simplify, it is somewhat like a diary that most of us maintain to record our daily events. An investment scrapbook is a detailed record of all your trades. But does not the contract note cover that? Actually, you need to go further. The scrapbook is an analysis of the thought process behind these trades and your understanding and interpretation of the outcome. Over time, this investment scrapbook becomes a kind of veritable guide that you can fall back upon.

Investment scrapbook is a record but also a thought process

Since actual trading keeps you occupied during trading hours, keep the scrapbook activity as a post trade task. The most important thing that a scrapbook does is to document your thinking behind each trade. You can, therefore, mentally back test your logic and see if the logic works. When you make a profit or loss in a trade (it could be actual loss or MTM loss), the investment scrapbook must record honestly, where you think you went wrong.

Apart from strategy, the scrapbook can also be a review of the trading process adopted by you. For example, you may have kept the stop loss too close. It is also likely that you used a market order where you should have used a limit order. The investment scrapbook must record where you believe you went wrong and how you need to rectify in future.

To the extent possible, keep your scrapbook actionable

If any idea is not actionable, it is not worth spending time over. That should be the guiding principle of your investment scrapbook. You maintain the scrapbook to find better ways to make profits in the market. The trade is an amalgam of your trading view, the process and the psychology behind the trade. What makes an actionable Investment scrapbook?

For the scrapbook to be actionable, your observations must be classified into controllable and non-controllable factors. Prioritize the controllable factors. Secondly, use the scrapbook to fine tune the processes which include how you set stop losses, profit targets, order type, order size etc. Finally, you need to review the actions taken with an Action Taken Report on a weekly basis. These basic ideas can make your investment scrapbook more actionable.

Will the investment scrapbook improve performance? It certainly can!

That is a tough call. The investment scrapbook does not directly do anything to your performance. But, it does provide the trigger to enhance performance. Here is how.
  1. The investment scrapbook is, at the end of the day, an honest and independent evaluation of where you went right and where you went wrong. Since this investment scrapbook is a confidential document, you can afford to be brutally honest. It is not meant to make you look good as it is not a marketing presentation. The investment scrapbook makes you think objectively about your decisions, actions and impact on performance.
  2. The investment scrapbook tells you the truth about shortcomings in your trading plan and the focus areas. An action points is not just about explaining what happened but to goad you into corrective action. Thus, the investment scrapbook goes beyond merely giving suggestions and actually provides pragmatic inputs on performance.
  3. Remember that the investment scrapbook purely focuses on controllable factors. The most inane thing you can do is to blame the performance on market volatility. That is anyways beyond your control. The investment scrapbook draws your attention to trading actions and remedies rather than just analyzing the environment.
  4. The investment problem puts you in a head-on collision mode with the reality. You just need to face the truth. When your stop losses are triggered continuously there is either a problem with your grasp of the market trend or you are setting stop losses wrong. Once you zero in on the problem, you just need to change tack.
  5. Warren Buffett once said that good investments are not about good strategy but about good habits. There is an element of internalizing your learnings into future strategy and converting them into good trading habits. That is what the investment scrapbook helps you to do. Over a period of time, the investment scrapbook becomes your tool to build and cultivate good investment habits.
What else can the investment scrapbook contain?

There is really no outer boundary to what your investment scrapbook can contain but have a simple focal point to it. It must help you improve your investment methodology and your investment performance. That is the bottom line. Remember that the investment scrapbook may look patchy in the beginning but it is a gradual and iterative process. The most important criterion that you must always keep in mind is that whatever you write down in your investment scrapbook; it must ultimately be actionable. It may not help you find multi-baggers, but it will surely help you manage your risk better. That is good enough!

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