Fool's Eye View

[ December 29, 1999 ]

Reflect and Learn

By Alan Oscroft (TMFAlan)

Liverpool -- If you've just opened this page with trepidation, thinking "Oh, no, he's not going to do another look back on the year/century/millennium that we're leaving behind, is he?" then worry ye not. Cos he ain't.

No, what I want to talk about is the need to look back and reflect on our own investment decisions, how our strategies have progressed, and how much we have learned from our experience so far. Because, though we may learn a lot from online sites like the Motley Fool, from books, or from the experiences of others (and they all provide valuable education), it is our own experience that teaches us the best lessons.

There are many who tell us that, in our investments, we should buy, sell, and then forget, and that there's nothing to be gained from looking backwards at our old decisions. To some degree, this Fool would agree with that -- we should never use hindsight to look at how companies' share prices have fared since we sold them and fret over bad selling decisions. And never have regrets over how high companies we failed to buy have risen since we decided against them. No, we should always avoid emotional attachments to the companies that we choose to invest in, especially after we have subsequently sold them.

But on the other hand, I think we really should critically re-examine our old buying and selling decisions and try to evaluate, using the cold unemotional eyes of hindsight, whether we made the right decisions using the information and analysis that was available to us at the time. If we don't do that, how else can we evaluate and refine our investment strategies over the years?

When, with the benefit of years of experience, you have found the perfect strategy for you and you are convinced that you can unwaveringly follow it with the necessary tunnel vision and steely determination, dispensing with emotion and ignoring all distractions, then there may indeed be nothing you can learn by looking back. But very few of us are in that enviable position.

So, while the tabloid and telly world is boring us stupid with the best goal of 1999, the biggest public gaffe, the most stupid quote, the most corrupt politician, or the most annoying annual review, why don't we break the tedium and take a couple of hours to think about whether our investment decisions of the past year were good ones or not?

But don't forget, the performance of our shares since we bought them does not tell us whether they were good decisions or not -- it just tells us whether they were successful (so far) or not. And short term success can be due to many things, not least of which is luck.

Anyway, I've been putting my money where my mouth is (or rather, I've been putting quiet reflection where my buying and selling decisions were). I buy and sell very rarely, and have only made a few trades over the last year, so I don't have many decisions to ponder.

With hindsight, the decision that looks to be my most disastrous was selling shares in Trafficmaster (LSE: TFC) early in the year, and it would be easy to write it off as a bad decision. On the one hand, I sold shares in a company that I would have been happy to hold on to. But I sold for a good reason -- I needed some money. I could have sold something else instead, but according to my valuation criteria at the time (essentially similar to the Fool's Germinator criteria, and based to some degree on a company's PEG), Trafficmaster was the least undervalued of my companies and so was the right one to sell, I think. (My intention was to buy them back a few months later, but the stratosphere had been reached by then, at least according to my criteria, and the rest of the subsequent fourfold price increase is now history).

My worst decision, I think, was buying shares in a company in the leisure industry; one that runs nightclubs, to be specific. I bought shares in the company, Northern Leisure (LSE: NLS), twice at two different prices, but have since sold them all (pretty much breaking even) after finally realising that it was a mistake for me to have bought any in the first place. And my mistake? Were the company's fundamentals unsound? No, I don't think so. Are they currently overvalued? No, probably not -- in fact, a PEG-based valuation suggests they might even be cheap.

No, the reason my purchase was a mistake is as old as the hills. I bought a company in an industry that I do not understand and do not like. Hell, I hate nightclubs, and I never go near the things. So why did I ever consider committing my future wealth to them? I'm happy not to own them any more, and hope I can look back with detachment this time next year, not feeling bad about any rise in the share price that might have happened by then.

And my other investments of the year? I won't bore you with the details of them, but I made four other purchases, all in things that I understand and whose fundamentals satisfied my personal criteria at the time. And they still do, so I'm still happy with those decisions and plan to keep my holdings for a long time to come. But if I come to realise I've made a mistake with any of them, I'll be out rapidly. And I'm going to keep looking back as well as forward.

Any thoughts, please post them over on the Fool's Eye View message board.