How to Measure Your Success as an Investor

Since I work for CFA Institute, you probably wouldn't be surprised if I said the best way to measure success is to follow the Global Investment Performance Standards (GIPS). After all, many professionals think GIPS is the global gold standard. Now here’s something that may surprise you: CFA Institute’s standards are a subset of a much better, more comprehensive, way of measuring your success as an investor.

See, in my opinion, the most important skill for investors is understanding information. Or put another way (and more philosophically): To what degree is your mind in accord with reality? If your mind is not in accord with reality, your decisions are based on distorted understanding and distorted information. You may still do well as an investor, but it will be because of luck and coincidence, not skill. Thus, the first job of investors is to understand the world with as little mental and emotional distortion as possible. Harmonize with reality.

I believe definitively that returns are an outcome (i.e., the effect) based on the degree to which you are successful at understanding information (i.e., the cause). In other words, investors almost exclusively assess their skill by analyzing their returns, all the while ignoring the decisions that led to those returns in the first place. Of course, this is not all it takes to be a good investor. But first you must understand information, then, and only then, do you decide what to do with that information.

In the early days of my investment career I was anxious because I needed to know a critical thing: Am I good at this super complex and competitive endeavor, or not? One day I realized in an Aha! moment that the returns of the fund I co-managed did not reflect all of my decisions. Instead, returns reflect only the results of the securities I chose to purchase for the portfolio. Another way to think about it: The portfolio returns directly reflected only a limited number of the affirmative decisions I made, and only indirectly the negating decisions.

What about all of the news I had digested and interpreted to ensure I understood things like GDP, corporate earnings, discounted cash flow analysis, technological trends, demographic shifts, and so forth? What about all of the companies that I had bypassed for purchase because they did not fit my theses, or that did not pass muster after my modeling of their futures? What about all of the management teams I spoke with that failed to assuage my concerns and convince me they deserved my shareholders’ hard-earned capital? What about my failures, near misses, and weighting errors? What about the emotions that distorted my decision-making? And on, and on. As an investor I was making thousands of decisions about my understanding of reality, and the portfolio returns tracked only a super small minority of those decisions. Returns are nice, but they are clearly feedback on only a subset of an investors' full decision suite.

So I realized that to fulfill my aspirations to be a good investor I needed to record, date, and consistently examine a much higher percentage of my decisions. (Note: I believe it is impossible to record every decision due to the thousands of decisions made daily.) I could then check in occasionally to examine to what degree I was in accord with reality.

Then I had to be unabashed and courageous in examining my failings. Then I had to muster the energy to craft answers to the questions raised by my examinations, then create solutions to those errors, and then I had to muster the courage needed to dare to change.

With all this in mind, I believe the best way to measure your success as an investor is:

1. Ask yourself to what degree is your consciousness in accord with reality?
2. Gain as much consciousness about your decision-making as is possible (hint: try meditation).
3. Record your important decisions in an investors’ journal. This should include the who, what, where, when, why, and how of your investment decisions. Pay particular attention to your emotional state at the time of the decision.
4. Review your journal at least quarterly and also whenever a major change in a decision occurs, such as a purchase, sale, or when an investment requires a major decision (e.g., merger or acquisition, CEO change, earnings announcements, etc.).

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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