Investing in a new position is often a simple decision to take : you’ve done your research, you pay far less than the value you estimated, and it beats your opportunity cost. Great, you take a position in the stock.

But once you’ve taken that decision, the real struggle starts. Welcome to the great shareholder ride ! Everyone who’s ever taken a position in a stock knows what it is about. Everyday or so you receive information potentially affecting your positions. There’s signal and there’s noise. Consciously or not you’re deciding on how to classify that information. And this is the tricky part : everything is able to shake your thesis if you don’t hold it strong enough. This can lead to both commission and omission errors as you take facts, rumors, infos and incorporate them into your story. 

As Richard Feynman said, “The first principle is that you must not fool yourself—and you are the easiest person to fool.” I tend to follow Keynes’ advice “when the facts change, I change my mind”. However, I stand firm within my convictions until I can logically/statistically come to a conclusion refuting my previously held view. Here’s a tool I’ve been using to do so.

Introducing the Decision Points

The “Decision Points” is a 1- or 2-pager document where I distill down the essence of my investment. I first came across that concept during my first position as an equity analyst. Over time I refined it to best suit my own investing philosophy. 

It now has 7 sub-parts :

1/ What reasons led me to invest in that stock ?

2/ What flaws does the company/stock have ?

3/ What are the key metrics of the company ?

4/ How do I expect them to change over time ?

5/ What are my expectations in terms of value ?

6/ What could go wrong with that investment (and potential remedy) ?

7/ What would lead me to sell my position ?

Though I cannot overstress the importance of having a checklist, Decision points are not a checklist (if you’re not convinced, read the Checklist Manifesto by Atul Gawande). 

They have multiple and complementary roles. Here’s what I try to achieve with the Decision points : 

1/ It gives you no place to hide : either you can explain – and write – why you hold an investment or you don’t. If you cannot, forget about owning it, you’re probably fooling yourself. 

2/ It sets clear expectations about your investment at the onset. It doesn’t mean you won’t be able to change them but it forces you to think about the future of the company, about its future paths and how they will affect your investment.

3/ It forces you to reflect about the essence of a company, of what really matters. You then understand which metrics are important, which ones to follow over time, which ones to be careful about, etc.

4/ The corollary of the previous 2 points is that you must reflect about the value vs price differential, such that you have to give your expectations, reflect about their probability and see if your scenarios pass your hurdle rate. Ultimately, Decision points should clearly state what you expect to earn with that investment, what’s the range of intrinsic values you envision, and what’s the margin of safety.

5/ It serves as a Pre-Mortem. Assuming your investment has gone bad, what do you think has gone wrong ? It forces you to think about the things you’re not comfortable with and be extra careful about them. As such, it serves as a feedback loop for the previous points.

6/ The most important role is probably that it preempts the selling decision. When your stock is up 50%/100% or more, and you either feel like “Ok, this has room to go up more because bla bla bla”, or “This has gone too far too quickly, valuation is now way too rich”, Decision points are here to remind you what you were thinking when you head was cooler and not yet influenced by the fact that you owned the position (same goes when your stock drops by 30-50%). You use them to remove emotions you have about your investments and as such reduce the possibility of selling a stock you correctly identified as a multibagger, or sticking to a value trap that violated the criteria you initially set.

In order to be effective, I think Decision points must have the following features : 

1/ Short : it must be quick to read so that you can read them regularly and make them part of you.

2/ Straightforward : don’t try to hide behind vague words (especially adverbs).

3/ Thorough-ish : as the French saying goes “Le mieux est l’ennemi du bien”, so don’t try to be perfect by covering 100% of possibilities, it would make the Decision points ineffective by drowning the gist within detailed improbable cases.

4/ Transferable : though Decision points are deeply personal, I think someone else should be able to read them and know why you hold an investment, what are your expectations, etc.

5/ Flexible : you must be able to adapt your thinking based on what happens. Of course the company won’t follow exactly the paths you’ve imagined, so you must be able to change your mind. It doesn’t mean you breach what you’ve written previously, it means you keep your facts and reasoning up to date.

Decision points are a time travelling tool : it reminds you what you thought at one precise point of time. It keeps you accountable to yourself and removes the possibility of your memory fading. It’s your cool head friend, the emotionally unaffected version of yourself, your own version of the 10 commandments for your investment. Should I stay or should I go ? It’s probably the hardest question an investor faces. Decision points have been a good risk management tool to answer that question for me.