Friday, October 28, 2011
Personal Investors and Discipline
I remember practicing wind sprints for track and field in high school. I noticed a guy around my own age hanging around the track as I practised. I would get into the starting blocks, in the ready position, then set, and Go! Over and over, again. The bus would get me to school 45 minutes early, so I had lots of time to change and practise before classes started. On this particular day, the person watching me didn't seem to have anything better to do, so he just hung around watching me. I didn't even say anything to him, I was just trying to concentrate and visualize for my next race. After quite a while our eyes met, and he said, "You know, I could be just as good as you if I practised like you do." I had no doubt, as I was less gifted at sprinting than my brother. For all I knew the only difference between my success and my bystanders lack of it, was the discipline I applied in training most mornings.
Not Just A Game
We need to do what we know, and not just know what to do. There is a big difference between the two. When it comes to learning about investing I encourage people to paper trade. This lets them learn the mechanics of entering a position, tracking it, and then, later, selling it. No matter how long we paper trade, it will never completely prepare us for the real thing. When there is serious money involved, dealing with the emotions that come up becomes the real key to success.
Buy High; Sell Lower?
Everyone knows we need to buy low and sell higher, but people who lack the proper discipline usually end up buying high and selling lower. Without a proper plan people end up wanting to buy after the trend is well established, and sell when the pain gets bad - usually at a bottom. In fact, that is what causes the bottom - when those wanting out have done so, the price can begin to rise, again.
The problem is compounded when people buy and sell on impulse. Rumours and opinions generate greed or panic. Fear is contagious - when a run starts in the market, it will often overshoot the bounds dictated even by logic. In fact, there is a saying that the markets can stay irrational longer than we have the ability to stay solvent. There are definitely times when fundamentals, and even times when the technical indicators defy logic. These are times when we cannot rely on emotions, let alone logic. We need a tried and true methodology that will protect us from ourselves, but we also need the discipline to stick to that proven strategy.
This past fall, I simply could not get myself to believe the government stimulus in the U.S. economy would drive the stock markets as high as it did. I kept waiting for them to fall. Instead, I needed to follow my own methodology and take advantage of one of the best market rallies ever. These are the times when proper discipline saves us from getting it all wrong by falling victim to the deception of our incorrect impulses.
Less Emotion, Not Emotionless
That is not to say we should not be passionate about what we do and how we do it. It does mean managing our emotions so they do not blind us, preventing us from seeing what is really going on. Good strategies keep us on track doing what we know works. One of the most important factors that gives great investors an edge is their ability to be disciplined in executing proper strategies. I believe there is only one other thing more important than this, and I will blog about it next time.
Do you consider yourself to be a disciplined investor. If not, why not?