Sunday, March 22, 2015

Verdict Log: Systematized learning from failure (and successes)

“I’ve learnt so much from mistakes that I am thinking of making a few more.”
- Unknown

The verdict log is a tool I developed when I heard many people in the investment community talk about it. Even in my professional investing experience (with investment banks or a hedge fund) I have seen the stark difference in the clarity of thought of investors who keep a verdict log and those who don’t. The verdict log maybe kept in one form or another.

So what is the verdict log? A verdict log, in my definition, is a two column table with dates and verdict notes. Verdict notes are the bottom line opinion in 3 lines or less of the analysis and data collected up to that point on a company. I maintain a separate verdict log for each company.

The biggest advantage is that with 20/20 hindsight one can very easily analyse the thought process that went into the investment and how it could have been improved. The things that were right are stark and so are the things that are wrong. It is absolutely fine if you are not one hundred percent sure of what is going to happen to a stock – in fact if you are a hundred percent sure the verdict log will create doubt as it forces you to think about all the aspects of the investment.

Other methods I have seen to achieve this are to maintain an investment thesis history, or financial model versions for those who rely on them. How the log is maintained and kept is not important. What is important is for you to be able to look back and understand how you thought about a particular situation and how you think about it now.

Several professional funds (read highly successful ones - mutual funds and even a hedge fund) use this tool in many forms. Some have traders do a write-up which is signed off by risk before the trade happens. Yes – all funds are not cowboys saying yeehaw before each trade. Some are actually systematic. Some of these funds might not create massive returns in a single year but over time the systematic approach definitely yields better results.

The bottom line is that all these tools are there to remove your biases and reduce your reliance on your memory. There is too much information that is going to be running through your mind during the process of value investing and it is very difficult to remember everything. The intelligent investor knows what to tune out as noise and what to listen to as music.