Learn from Past Investment Experiences

Physician's Money Digest, October 2006, Volume 13, Issue 10

In financial and investing spheres, repetition of mistakesis common. Bubbles and their painful aftermathare well-documented fixtures of markets andoccur with some regularity. Advancing technology isof little help, since the underlying problems stem fromdeep-rooted psychological tendencies. If anything,increasing technology and complexity magnify thepotential harms stemming from each mistake.

Repeating Mistakes

Though potentially unpleasant, a careful and objectivereview of past investments is critical. Most casualphysician-investors avoid the unpleasant task of analyzingand learning from past experiences, leading torepetition of mistakes. One of the most psychologicallydifficult aspects of conducting a careful review ofyour own track record is that it forces you to confrontthe reality associated with your investment decisions.Our normal tendency is to suppress painful or distastefulmemories and experiences. This process of suppressionmay help explain why so many physicians gotinto trouble in the last tech bubble.

You can also benefit by systematically tracking eachinvestment decision you make and then following upto relate that decision to its ultimate outcome. To conducta review, think back to the investments that youhave made in your life and think about the results.Separate the list into two columns: successful andunsuccessful investments. Are there certain commoncharacteristics shared among them?

If this is the first time you have systematicallyreviewed your past results, remember that all seriouslong-term investors keep an investments log. Keepinga log makes the process almost automatic. Each timeyou make an investment decision, record the pertinentdetails of the investment, including the date andamount of the investment, and a brief summary ofyour investment rationale. A proper log forces you toput your investment rationale down on paper at thetime of your investment commitment. Sometimes,reviewing your written rationale and applying criticalthinking may even help you avoid mistakes.

Well-suited Advisor

Ask prospective advisors to share informationabout their past mistakes. If they demonstrate adetailed grasp of specific mistakes and what waslearned, or volunteer that they maintain a log and systematicallyreview it as a learning exercise, you may beon the right track. On the other hand, if they say theydon't make mistakes or if they don't have much of agrasp of their past experiences, it may be an indicationthat you should move on.

No one likes to rehash painful memories. Becausethe task is painful, it requires each of us to make thecommitment to include it in our routine investingprocesses. An upfront commitment to the reviewprocess will allow you to overcome the pain andthereby reap the learning and improvement opportunitiesthat will, ultimately, make you a far betterphysician-investor.

Kaushal B. Majmudar, CFA, is president of the Ridgewood Group,a Short Hills, NJ-based money management firm focusing onintelligent investing that is rated 5-Stars, their highest rating, bythe Paladin Registry. Founded by Mr. Majmudar and Ms. AhalyaNava, a Harvard Business School graduate, the Ridgewood Grouphelps clients around the country manage their wealth more intelligently. Theywelcome questions or comments at 973-544-6970 or info@ridgewoodgrp.com.For more information, visit www.ridgewoodgrp.com.