The Joys of Compounding by Gautam Baid
Journaling Is a Powerful Tool for Self-Reflection
A journal allows you to collect accurate and honest feedback on what you think when making decisions. This feedback enables you to recognize when you were simply unlucky. Sometimes things work out well for reasons other than what we expected. This feedback loop is critical because the mind cannot provide it on its own.
We don't know as much as we think we do. We are duped into believing that we understand something when we do not, and we have no way of correcting ourselves. To preserve our sense of self, our minds revise history. The story we tell ourselves conjures up a linear cause-and-effect relationship between our decision and the actual outcome.
A journal is the most effective treatment for this cognitive malfunction.
Conducting a premortem in investing allows us to take appropriate corrective action on time in the future.
For example, imagine that a year has passed since the date of your purchase and that you have lost money on your investment, even in a stable market. Now, write down what went wrong in the future on a piece of paper. This "prospective hindsight" technique forces you to broaden your thinking, consider a wide range of outcomes, and focus your attention on potential sources of downside risk that did not intuitively come to mind the first time you considered buying a stock.
Visualizing various scenarios for variables beyond one's control also helps investors make better decisions about individual position sizing and portfolio construction.
Writing is not only a communication tool; it is also a thinking tool. It is nearly impossible to write one thing while thinking about another. When you force your hand to write something, it channels your thoughts in the same direction. So journaling turns out to be a tool for thinking and a highly effective medium for focusing our thoughts. It has therapeutic benefits as well.
We are writing to aid self-reflection, which is a great way to alleviate any unhappiness in our lives. Writing also improves our memory because we remember more when we write down our thoughts and learning.