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Stick to Your Guns – Investing with Discipline
Have you ever noticed that the kids who have been disciplined throughout their young lives are the ones who act the best in public? Have you ever noticed the best hitters in baseball are the ones that are disciplined enough to wait on, and hit, the curveball? Have you ever noticed that the best quarterbacks in the NFL are the ones that are disciplined enough to stand in the pocket and get slaughtered by a blitzing linebacker as they deliver the touchdown pass. It’s no coincidence that discipline is the common denominator, and discipline is what you should be applying to your investing.
I will now give you the most valuable piece of advice you will ever get as it applies to investing. Invest with discipline. The stock market is an ever-changing monstrosity that takes us through financial and emotional peaks and valleys, wreaking havoc on a regular basis. However, if you are disciplined in your investing it can be a much smoother ride. The saddest part is that most people believe they have a discipline. They say, “I’m going to buy quality issues”. This is not a discipline. This is a broad statement that could entail anything your emotional state allows it. A discipline defines your investing style. For example, William O’Neil states in his discipline that he believes in selling any stock that falls seven percent from its high. That is a sell side control. I don’t believe in that particular obedience, but it’s the discipline that O’Neil believes will give him acceptable returns with limited downside risk. Another example is Warren Buffett’s belief in buying companies that he believes are good long-term holds. He looks for companies to invest in that fit his fundamental criteria and he literally looks at his investment as an actual ownership in a business. He does not sell his holdings unless the fundamentals of the company change, per his proprietary criteria. Buffett’s discipline emphasizes the buy-side fundamentals of his investments.
Tom Naylor once said, “The bigger the real-life problems, the greater the tendency for the discipline to retreat into a reassuring fantasy-land of abstract theory and technical manipulation”. Now, be honest with me here. Doesn’t this sound like most investors when the market gets hairy? You become dazed and confused and try to justify holding onto that “piece of garbage stock” until you’re down 50%. The discipline you thought you possessed retreated into some hole far, far away. I’m here to tell you that making sell decisions is the single hardest thing to do in investing and that’s why you need a discipline. On the sell side, a discipline can completely remove the emotion from your day-to-day investing. It takes away the indecision from your investing because, essentially, it will make the decisions for you.
As a company, we have many aspects of our discipline that may translate into your daily investing. I can’t give you all our secrets, as we wouldn’t have any clients. But, here are a couple tips to start building your personal investment discipline with. FIRST, we only buy companies with a certain minimum level of fundamental health. We don’t buy stocks that have poor earnings growth and we don’t substitute good earnings growth with the “hope” that things are turning around. Keep in mind that you’re always going to be tempted by things you see on CNBC and the tips your “brother’s uncle’s sister’s postman’s cousin” gives you at the family reunion. If you make it a point to buy quality, you’ll never be sorry. NEXT, we attempt to use stop-loss orders under what we deem are key support levels. These stop levels can vary from 1 or 2% from the current price to 18-20% below the purchase price with aggressive investments. Keep in mind if you use stop loss orders, you undoubtedly will get whipsawed out of some stocks you want to be in. But, more importantly, you will protect yourself from catastrophic losses. There are always other stocks coming by, particularly if you invest in technology. Further, once you’ve placed your stop order, make it a point to only move it up from that level. Never move it down. Don’t second-guess your stop order when the stock gets close to the chosen level. LAST, we have somewhat of a mixed strategy in the stocks we buy. On one hand, there are some stocks in our portfolios (i.e. Cisco, Citigroup, Wal-Mart) that we would like to hold onto, outside of a significant fundamental change in the economy or the group. Our belief with this select group of stocks is that if the economy and the market work, these stocks will participate as leaders. On the other hand, there are select stocks that we consider “active stocks”. These stocks are more aggressive issues that typically give us a clear technical buy signal. With the active stocks, we use a series of stop loss orders to protect our downside and expect to lock in our profits within a relatively short period of time (usually one to six months).
On whole, my point is this; Give yourself some consistency in your investing and stick to your guns. Disciplined investing does not mean you can’t buy speculative issues. Simply know the place for that type of investing in your portfolio. If your discipline is “buy and hold”, then buy and hold and don’t second-guess that decision when the market is falling. If your discipline is to use 7% stop loss orders, then use 7% stop loss orders across the board and don’t make exceptions. If your investing discipline calls for picking stocks out of the formations in the stars, then darn it buy stocks that call to you from the heavens. In reality, your discipline, and your comfort level with that discipline, will take a while to surface. I truly believe that your investing style will form itself through your personality and your risk tolerance. Surmise a discipline that makes you comfortable and allows you to sleep through the night. You’ll thank me tomorrow. |
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