7 Investment Disciplines to Practice

By Jim Farrish | December 02, 2008 | 9:32 AM | 0 Comments

When it comes to investing, the challenge is maintaining a disciplined approach to managing your portfolio. Too often the emotions of the market cause you and I as investors to throw discipline out the window. The current market environment is an example. I have been teaching disciplined investing for more than 20 years. Every time we have a major correction readership goes up significantly. Whenever we have an irrational rally investors ignore the articles on discipline because the market is going higher and they are making money. The reality it is market extremes up or down that discipline plays a key role in being successful. I want to cover seven investment disciplines that are important to implement every day.

1. Keep your eye on the big picture. It is always easier to focus on the problem versus the bigger picture. In today’s market we are focused on the financial sector. The problems with liquidity and credit have many micro managing the market versus stepping back and looking at the horizon. While the outlook remains negative in time things will improve and the outlook will improve. Looking at the broad market and the 10 major sectors which make up the US equity markets we can see what is lagging and what is leading. This is how you start to see improvement. For example, currently energy, industrials, consumer durables and utilities are holding up under the selling pressure. These pockets are where strength is likely to develop first. Therefore, by watching across the sectors you begin to see where the strength of the market is as well as the weakness. This allows you to have a discipline strategy to take advantage of the opportunities when they arise.
2. Don’t fight with the Bulls or the Bears. Attempting to make a case for being a bull or a bear is a losing proposition. The trend is your friend and following the trend will dictate being bearish or bullish. If your strategies aren’t working in the current market cycle find the one that does. Don’t fight with the market. I have heard too many time investors tell me emphatically the market should be ____. You can fill in the blank. The market will do what the market does. By learning different strategies to approach the market, bullish, bearish or neutral, you put yourself in a position of playing the trend versus fighting it.
3. Be willing to sacrifice. As the country song goes, “you’ve got to know when to hold em’ and know when to fold em’. This is knowing your personality as an investor. If the risk of the market is too great for you, sit it out. If the risk of a particular position is too high, pass. There is nothing wrong with missing out on a particular investment. Know your risk tolerance and threshold of pain. This allows you to avoid the more dangerous pitfalls of investing.  I have called this money psychology for many years. If you can analyze yourself you will be well ahead of the game. I know personally when the risk premium of the market rises I am happier in cash than I am trying to pick the right investment at the right time. If I protect my principle I get to play another day. If I lose my principle I have to work harder to make it back, not to mention the brain damage from losing. Stay focused on your portfolio and your money management discipline, not someone else’s.
4. Remain calm. This is not easy to do when the proverbial crap is hitting the fan. I talk about developing a discipline strategy of scanning the market, watching what I scanned and liked, then putting into play positions from my watch list as a way to approach investing. This is followed up with putting on plays that I predefine the entry, exit and target from my watch list. The key is knowing. This knowledge arms you with the best defense for emotions. If you don’t have a strategy for entry, exit and target, panic could take over. No rational decisions are ever made during a panic attack. Develop a plan and stick with the plan.
5. Motivate yourself. During periods like this I have to understand that even though I am in cash and only making 2-3% money market yields, I am not giving up 30% of my money to the selloff in the broad markets. I also know there will be ample opportunities to put my money to work as the market bottoms. The same is true on the upside, taking profit is what provides me the lifestyle I want from my money. If you buy an investment that goes up 20 or 30% and you achieve your goal, it is okay to sell. It is okay to take profit! This is what provides the lifestyle of why I am investing to begin with. The idea of making money is to put the money to use. This is why you have a goal for your portfolio.
6. Claim the victories. This is taking profit from positions you built in your portfolio that worked. Taking a loss based on your discipline is also a victory. Even though you don’t think so in monetary terms, it is in terms of following your discipline. This goes back to the process of defining the entry, exit and target prior to buying any position in your portfolio. Following your discipline is a victory every time you do so.
7. Stay positive. If you can’t be positive in a negative market – walk away! Take a vacation or have a party. A negative attitude will cripple you when it comes to managing your money. Even in down markets there are opportunities if you look for them. When you get focused on the negative market environment you tend to miss the opportunities it creates.

Maintaining a disciplined approach to managing your money is ultimately what makes it fun. Too often we think of discipline as a negative, but in reality it is what creates the fun that results from winning. The most fun I have is when the market presents an opportunity and as a result of my discipline I capture the resulting benefit. No matter how big or small the victory, it is the confidence that results from being disciplined. Practice discipline in good markets or bad so that you can achieve the goal of your portfolio.