AN INVESTOR’S NEW YEAR’S REFLECTION

The end of each year is a time for reflection, a time to evaluate the things we’ve done well and places we can improve. Here’s a list of questions you can ask yourself as you look towards the new year:
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1. GOLDEN RULE: How often do we follow the investment Golden Rule? (Golden Rule: If I were investing in this asset for the first time today, would I be at this position
size?)
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2. SMALL POSITIONS: Do small positions have a positive or negative impact on our performance and process?

3. MENTAL CAPITAL: How effectively do we allocate our mental capital?

4. NEW IDEA PROCESS: How can we improve our process for getting new ideas in our portfolio?

5. POSITION SIZING: Is there a formal process for sizing positions?

6. EXISTING IDEA PROCESS: How can we improve our process for managing existing positions in our portfolio?

7. PRE-RESEARCH CHECKLIST: Do we have a checklist of things that preclude us from investing?

8. RESEARCH CHECKLIST: Do we have a checklist for things we deem important for every investment?

9. SELF-IMPROVEMENT: Do we encourage our team to improve their mental models and outside view?

10. MEASURE & FEEDBACK: Do we have a continuous process of measurement and feedback that allows our team to see how they’re doing?

NOTES FOR QUESTIONS ABOVE:
1. Self explanatory

2. Small positions that consume time and energy (mental capital) but do not have a material impact on performance are a drag on efficiency.

3. In a given year, your team has a limited number of hours to devote to new and existing investments. It is important to figure out the total number of hours per analyst (usually around 2000 hours) and divide that by the number of hours you expect each analyst to spend on an investment. This will approximate the total number of investments an analyst can research.

4. Is there a formal process for pitching an idea that allows for the devil’s advocate, evaluation of the investment checklist, etc.?

5. Position sizing is almost as important as asset selection. What are the inputs that determine how we size positions and what is our process to make sure we’re appropriately sized?

6. What is our process for monitoring existing positions? Do we have a process for taking new information and determining how it should change position size? As prices change, how do we ensure that we maintain the appropriate position size? When prices go against us, what is our process for re-underwriting the position?

7. There are certain factors (cost to borrow, liquidity, initial valuation, crowdedness, etc.) that may preclude an investment and, if discovered early, would save mental capital.

8. There is a set of requirements for every investment decision (model, conversation with management team, conversation with at least three contrary opinions, assumptions stress test, etc.). Are these documented so that important items aren’t missed?

9. Google gives its employees “20% Time” to allow them to work on projects of their own choosing. The idea is that inspiration comes from many sources and employees can be bogged down in a “thought routine” and lose perspective. How can you help your team break out of those ruts with encouraged self-improvement? Forced day out of the office? Reading list? Classes? Creative “in-the-field” analysis (see the film “The Big Short” for examples).

10. Improvement requires feedback. Feedback requires measurement.

Clearly there are dozens more great questions (and if you have any, please send them our way), but this is a good start to frame the conversations for how you can become even better investors in 2016.