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Apprenticed Investor: Write This Down

The pre-purchase diary should be a simple one-pager; You should have down, in one place, all of the specific info you accumulated before making the purchase decision. More than mere info, however: These are the key data points you use to make your purchase decision. It can be on paper or in your computer; you can even blog it if you like. But the important thing is to go through the exercise of gathering all the data prior to making your actual purchase.

This attached Word doc is general, so it can be easily adapted to your own investing style. It includes elements of fundamentals (price-to-earnings, price-to-cash flow, catalysts, etc.); technical analysis (trend, volume, moving averages, etc.); and trade management (stop-loss, risk/reward ratio, holding period). If you do quantitative screening of any sort, this is also the place where you would describe the parameters.

Your trading diary is also the place where you write out what your "purchase thesis" is. It may be as simple as "This is an undervalued stock" or "I like the technical breakout." It could be "I think this new iPod thingie is going to be a big hit for Apple (AAPL - Get Report)."

Lastly, I rank my potential trades on a scale of 1 to 10. I want to see if my own gut-level expectations for a position turn out to be accurate. Am I better off only buying 8s, 9s and the very rare 10s? Should I own a broader basket of stocks? The ranking process helps me understand my own analytical abilities.

You should play with the trading diary -- add to it, personalize it, make it your own. If anyone feels they have significantly improved on it, please send it in an email. I will share it with the readers in a next column.
Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.

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