Your Own Personal Balance Sheet

Your Own Personal Balance Sheet

Every company has its own balance sheet that lists its assets and liabilities. The investor too has his own balance sheet that has its assets and liabilities. But we’re not talking about money here. Your assets are your underlying investment philosophy that houses the process you go through to achieve what you want to do in the market. What you want to do is to increase your return on investment. Your liabilities are what are holding you back from achieving that aim. Your focus should be on your process not the outcome. If you focus on the outcome you are tying yourself to the unknowable future which will cause you worry and angst as you grapple with the uncertainties of randomness.

Assets

Basic process involves

Margin of safety

Buy Cheap. Having a margin of safety will give you a tool in which to combat randomness. It will help limit your downside in the event of the unexpected. It is your most powerful weapon in your continual battle to cope with the randomness of events that confront you everyday in the markets.

Risk Management

Spreading your risk (buying a number of stocks and holding cash) and extending your time frames (long holding periods) as well as analyzing the current market environment (market breadth) is an additional tool you can bring to the battle field to face randomness. You will never really defeat randomness but maybe you can keep him at bay and maybe even use him to achieve your own aims.

Wager Value

Base your investment decisions on underused information. In other words try to do what most of your competition is not doing. Randomness feeds on conformity so it helps to be different. He may even have trouble recognizing you.

Liabilities

Psychology

Know yourself as best you can.

Human nature is insidious. You can do everything right, follow your process and execute your investment ideas flawlessly but one day the market will do something to disturb you. Someone will say something to worry you. You will feel the urge to do something, to tinker with your holdings and  the next thing you know you are lost and out to sea. If you have a sudden impulse to act, pause and think twice, consider the ramifications of your actions, it might save you some heartache and money. Now there will come a time when you should do something but those times will be few and far between and when they come your actions should be strategic and deliberate.

Learn to observe your own behavior, especially during times of trouble and worry. How you react to unpleasant events will shape and give form to everything else in your investment approach. Try to detach yourself from what is currently happening. Just observe the events around you and what is going on inside of you. What you are trying to do here is leave a trail of breadcrumbs back to yourself. In other words your problems aren't out there but in here, inside of yourself.