The investment decision journal: separating skill from luck

What to record, and when

The value of a journal rests on a single constraint: write before you know. At the moment of deciding, seven lines suffice.

• The decision itself: buy, sell, add, abstain. Abstaining is also a decision.
• The thesis, in one sentence.
• The assumptions that carry it, phrased so they can be falsified.
• The price paid, or the entry level.
• The horizon.
• The resolution criterion: what, at the deadline, will say whether the thesis was right.
• The degree of conviction, ideally expressed as a probability.

An eighth line is worth gold at review time: the alternative seriously considered, and why it was set aside.

The three biases it neutralises

Without a written record, memory does not store our judgements: it rewrites them. Three mechanisms, extensively documented by decision psychology, see to it.

• Hindsight. Once the outcome is known, we overestimate what we “knew” beforehand: the founding experiment is Baruch Fischhoff's, in 1975. After the fact, everyone saw the crisis coming.
• Self-serving attribution. Successes prove talent, failures blame circumstances. The journal keeps the original version.
• Selection. We retell our good calls and forget the others. A narrated track record is not a measured one.

The review: judge the reasoning, not the result

At each deadline, the decision is resolved: did the thesis come true, and for the reasons foreseen? Four cases emerge, and only two say anything about skill.

Being right for the right reasons is accuracy. Being right for the wrong reasons is luck, and luck does not repeat on demand. Being wrong despite sound reasoning may be nothing but bad luck. Being wrong for the wrong reasons is the only true fault, and the most instructive. Poker players call resulting the error of judging a decision by its outcome alone; Annie Duke made it the starting point of Thinking in Bets.

The same lucidity applies before deciding: Gary Klein's premortem consists of projecting into failure (“it is two years from now and the investment has failed: why?”) to draw out the reservations that group dynamics suppress. According to the research he cites, this exercise in prospective hindsight increases the identification of possible causes of failure by about 30%.

From a personal discipline to a family asset

Kept by one person, the journal is a discipline. Kept by a house, it becomes an asset: the next generation inherits not only positions but the reasoning that produced them, dated, motivated, confronted with reality. The fortunes that erode within three generations rarely die of markets: they die of memory fading. The journal is the organ of that memory.

And once convictions are recorded as probabilities, dated and then resolved, they become measurable: every forecast can receive an accuracy grade, updated as reality settles each question. The Brier score, devised in 1950 for weather forecasting, is the standard for that measure.

At Verdoso

Cassandra, the platform Verdoso built for its own wealth, keeps this journal natively: every decision is recorded the moment it is made, documented from source document to execution, then confronted with the markets at its deadline. Nothing is erased, neither the reasons nor the results. Discover Cassandra.