What do Apple (AAPL), Starbucks (SBUX), Ford (F) and General Electric (GE) all have in common?
Their businesses are built on churning out thousands and thousands of products each and every week. To be successful, they have to deliver products that meet or beat consumer expectations time and time again.
What those three companies have in common with most other successful companies — from industrial manufacturing to online retailers like Zappos — is a well-oiled process.
Not to get all “text bookie” on you, but a process is a series of actions or steps taken to achieve a particular end. The same can be said about investing — from all of the thousands and thousands of individual stocks, exchange-traded funds (ETFs), mutual funds, call and put options and more. You want to zero in on those that will generate the biggest profits with the least risk over a given period of time. To do it once or twice, you may get lucky. But to be successful for the long term, it means having a process in place.
You don’t want to be a “one-and-done” investor who continues to bask in the glow of one great trade. No, you want to be a serial investor who continues to get on base with, to use the baseball analogy, a number of singles and doubles. We won’t turn down the stand-up triple or even a home run, but at the heart of it we want to get on base as many times as possible without striking out. You have to refine your swing, and that means perfecting the process. It works for batting, and it works for investing.
One of the key strategies used by mutual fund and hedge fund managers is the post-trade analysis. Whether it’s a profit-winning trade or one that went south, dissecting where it went right or wrong and why is critical to the process. And yes, like manufacturing any widget, investing is a process. When a manufacturing line goes down unexpectedly or a product rolls off that line and something is wrong, the team looks for what went wrong and why to prevent it from happening again.
Successful, long-term investors have a similar process known as the postmortem trade analysis. If it was a profitable trade, what led to the investment in the first place? What data points and sources verified or reinforced the thesis behind the investment? If it was a trade that went south, what key pieces of information were missed? Did something in the industry or company change suddenly? If something did change, did you recognize the impact and how did you react? Why did you react that way?
I know you get what I am talking about — it’s like an autopsy for an investment. Let me walk you through an example.
Chris Versace is the editor of PowerTrend Brief — a FREE, weekly electronic newsletter. He also writes PowerTrend Profits, a paid monthly newsletter that helps individual investors profit through buying shares of companies poised to win big in the 8 PowerTrends, as well as writes the PowerTrader trading service that seeks to deliver short-term gains using stocks, ETFs and options. Chris has been ranked an All Star Analyst by Zacks Investment Research.