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The Art of Discipline:

Character consists of what you do on the third and fourth tries” – James Michener

If you stop to consider this quote, you might find yourself able to apply its perspective to a wide variety of topics and not simply investing. The definition of character to many is the combination of certain qualities or features that form one’s personality or determination in a situation. Character in many instances helps us to recognize our unique behaviour for who we are as an individual. Through experience we learn how to adapt to new environments and what to improve/correct when we do something wrong. We all know it’s most often easier to do something the smart way than to do it the easy or hard way. Discipline on the other hand is often interpreted in many different ways depending on the specific context. It’s not so much what you do on the first or second try, but what you do after each failure that matters the most. The process through which you critically examine your actions, evaluate your strategy and reflect upon mistakes will impact the character you build especially when applied to investing.

Investors often lack character because we don’t take the appropriate amount of time to evaluate our behaviours as much as we evaluate our returns. The obvious reasoning for this is that many investors view their success entirely over short periods of time. Evaluation can be a useful tool in helping an investor adjust their approach and subsequent actions after mistakes or missed opportunities and will have a direct impact on their ability to achieve success over the longer-term.

The difficulty for investors is that no stock, market condition or period of time is exactly the same as another and we recognize that learning is often easiest when you find yourself in the same situation over and over again. One change to a habit or behaviour can have a completely different impact when all other variables remain constant. Over time the stock market demonstrates cyclicality between periods of growth and contraction, yet conditions rarely are the same because of the always changing dynamic of markets. Supply and demand will fluctuate, consumer demands may change, new opportunities or threats will emerge and fundamental shifts within businesses can occur over short periods of time. No situation is ever truly the same and comparisons made to prior experiences by investors often lead them along the path of critically flawed assumptions or based upon emotional responses.

When an investor has a clear strategy, is able to critically evaluate and reflect, practices the proper amount of patience and has the discipline to stay dedicated to their plan then consistency will take care of itself.

The elegance of many successful investing strategies is not how an investor identifies, researches or executes positions in securities but the simplicity that helps them to maintain clear and precise objectives. Whether you choose to write your own IPS as a guide to your strategy or want to follow a set of guidelines you’ve written down in rough; having a framework that provides a clear focus can go a long way to protecting against the frequent habit of many investors to complicate the process.

Choosing a strategy is often stressful for new investors and there is a lot of indecision about the advantages and disadvantages of many well publicised approaches. What you first want to do when choosing a strategy is maintain an open mind throughout the decision process. There are literally hundreds of strategies and infinite variations that investors put into practice in the markets on a daily basis. The importance when assessing any of these is to be able to apply the relevance of the strategy back to your own unique situation. Remember that no one person will ever have the same goals that you will. There is never a right or wrong strategy for an investor to use, but what is important to do is match your approach with reasonable expectations.

Often the simplest strategies generate the most consistent returns because they remove the temptation to deviate to something more complex. If it works, why break it? It is also equally important to focus on what you do best and maintain a strategy that allows you to maintain your scope of practice. In nursing I have a specific education, skills and base of knowledge that allow me to perform certain acts under my license. What I never want to do, no matter my level of confidence or curiosity, is place myself in a situation where I’m liable of putting my license at risk. Using this example; an investor who doesn’t understand a specific group of investments, a strategy or possesses the needed discipline to put it into effect should not be pursuing such options regardless of its presumed returns.

Bottom Line: if you don’t understand what you’re doing or don’t have the time to learn then you are likely placing your capital at risk.

It’s important to examine decisions from the past and reflect today on what went wrong or why your reasoning appeared valid in a certain situation. Even when we reflect back, it’s important to realize what perceived changes we make to a process with the anticipation that those actions might impact the situation differently. Often an investor will lose money on a stock due to simple errors in evaluating that investment. This pattern of behaviour may go on for an extended period of time before the individual or someone else thinks to question the process through which those decisions are made. We often don’t critically examine our own behaviours enough in order to come to some conclusion of why a specific situation turned out the way it did. We may feel that we’re altering our behaviour enough to make a difference, but time after time we simply make the same fundamental mistake in an analysis or decision that continues to put ourselves in such a position for exposure to risk.

We often hear from investors that the performance of their first 4-5 years of DIY investing severely lags that of both expectations and the market as a whole (benchmark). The reason is often not due to our intention to reduce costs or control our own financial future, but due to our absent focus and discipline to stick with a specific strategy.

One frequent habit of many investors is pillow flipping. This term is often used to describe the constant turning many people suffer from during sleep when experiencing insomnia. Investors can suffer from the same type of behaviour where their buy or sell activities cause their conscience to flip-flop back and forth on whether their decisions were the right ones. How often have you heard an investor asking:

“Is it a good time to sell now?”
“Should I have bought more?”
“Bought Less?”
“Why does Company ABC always goes higher (or lower) as soon as I buy (or sell)?”

Someone may be constantly seeking validation that their decision was the right one, but rarely look to their own situation for the simplest answer. It’s often easier to follow the herd than to go against the grain and be independent in your own decisions. Seeking validation often indicates that you didn’t have the confidence in your investment decision and continue to question those motives or behaviours. With so many resources, opinions and information available to a DIY investor it’s no wonder that an individual might find themselves second guessing their strategy every 4-6 months.

Most first time investors will experience something similar to consumer dissonance: a post purchase consumer reaction after making a difficult decision that involves doubt and anxiety. This may cause an inexperienced investor to question their strategy, deviate multiple times to other strategies and under-perform the general market due to constant shifts in changing approaches. An investor may switch from one stock to another, one strategy to another, buying & selling far too often in an attempt to find “what works” time after time. Rather than allowing a strategy to work over a period of time that it’s intended to work an investor can’t help but constantly tinker in an attempt to realize higher short-term gains. What they fail to realize is that they directly impact their ability to enjoy long-term success by not giving their investments the time needed to compound and work in their favour.

All seasoned investors can attest to this behaviour because in some way we’ve all been there before and suffered these hesitations. The lessons when viewed in retrospect can often be expensive and difficult to reflect upon when you wish that you “Only knew then what you I today”. But there’s a process here that all investors go through along the learning curve through anxieties, uncertainty and questions in order to get to where we all are today. Many investors have the natural ability, but the skills, patience, understanding and environment are the challenges early on that need to be developed over time.

Patience, discipline and consistency are three key elements of any successful investing practice. While value is my preferred style of investing; patience is the most valuable component of what I do. My Value Rules function as a tool to assist me in locating and analysing companies and patience guide’s the remainder of those actions. Every person’s definition of patience will be different depending on their own preferences, but it is more than simply waiting longer than everyone else. Patience, to me, is what you practice when you want to be thorough, certain and have a full understanding of what you’re investing into.

It’s important to acknowledge that not everyone will be able to practice patience because your investing habits are likely to follow the personality you exercise in your everyday life. An important guide might be: before you can have patience with investing you have to have patience with yourself. Patience is often the combination of focus, caution, determination and diligence. Mistakes can certainly be made from simple omissions, but just as often occur when the improper amount of time is taken to look at an entire situation. An investor might jump into a position on speculation, recommendation or momentum only to find out later that there were obvious gaps in their analysis of what risk the company was exposed to. I certainly don’t advocate waiting longer than is needed to take advantage of attractive valuations, but having the confidence and certainty in your actions can go a long way to helping improve your investing returns.

For me, patience within my investing discipline is more important than any fundamental tool I use to evaluate equities for value. My Vale Rules and critical thinking skills for gaining insight into value often take a backseat to exhibiting patience in my decisions. Patience helps me not only evaluate a company from a fundamental standpoint, but often directly influences other factors such as timing.

To put this into some sort of context: the amount of time spent researching and watching each stock on my watchlist usually depends entirely on the objectives of the specific portfolio. The activities within my Healthcare Portfolio are largely passive in nature since I work directly with products, services and have a good understanding of the companies into which I invest. For Dividend Growth and Value I may spend as much as 15-20 hours per stock collecting information, studying fundamentals and watching them over a period of time. That may seem excessive to other investors and I realize that this practice is no guarantee of future success, but once a portion of my research is complete (SA, AAV, NAV, FMV) maintaining and updating new information over time becomes quite routine. Patience within my strategies is more about preparation than blindly buying into a position before I have complete confidence in my decision to buy. When or if something changes I can access the knowledge I’ve prepared, make a decision and hold the confidence that making a buy decision at that time was prudent and well prepared.

I’ll admit that patience hasn’t always been my forte, but over time you learn to develop a balance between excitement and caution. Through experience I’ve found that patience often allows a strategy to play into your benefit rather than those of others. Just as the metaphor I used of a burning floor in Subprime Fire, it is difficult at times to see the entirety of a situation when other events around you appear much more imminent. There may be times when it appears as though everyone else is benefiting from activities in the market and you’re not. But when everyone is in a hurry and running around in uncontrolled chaos there are always opportunities to take advantage of what everyone else can’t see. Investors will frequently chase a stock based on price due to fear of losing an opportunity rather than waiting for the price to come to them. The market is full of companies being bought above, at or below fair market value and nothing about that has ever changed. This is where patience can often be perpetually frustrating; when it appears you’ve lost out on an opportunity and its cost you something tangible in value.

Value will always exist in some form. I can’t count the number of times I’ve missed a stock by pennies and a substantial MoS only to later watch that stock fall further than I originally anticipated or other opportunities arise for the cash position I was holding. At other times while waiting for a specific stock I’ve even found something undervalued by equal or greater weight.

True character consists of what you do on the third or fourth try because often those are the moments when you realize change is needed and adapt to the situation. If you struggle five, six…ten times then the odds are stacked heavily against you that you’ll not learn from that mistake. Patience, as with anything, is a part of all of this, but also as important is the ability to look back on what you’ve done in the past in the hopes of improving for the future. The difficulty for any long-term investor is identifying when to maximize on opportunities when they present themselves in contrast to the constant need by many to make a quick buck. Consider my motto: “buy when fundamentals are high and valuations are low”. This motto is within my comfort level, my competencies and confidence that I practice time after time through various market events.

The most important theme that I’ve tried to get across to the reader throughout this segment is that patience as a discipline creates consistency over time. The true gem in all of this, as I’ve realized over the years, is that consistency takes care of itself when you take the time to follow a quality process through to the end regardless of the distractions constantly tempting you to deviate from your plan.

Once you are able to realize all of this the next step of Seeing the Big Picture becomes almost second nature.

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