Back to reality where most of us are just humans - basic fear and greed or herd mentality usually takes precedence. How often did you try to buy a stock and tried to catch its bottom? When it's selling at say $1, we queue at $0.995 or even $0.99 just to save that few dollars. Or when it's time to take profit at $1, we tried to sell at $1.05 or $1.10. We all have that same exact experience before and this is extremely common since humans are greedy by nature and are always looking out for the best deal around - be it the Great Singapore Sale or the IT Fair. Of course, we can never time the market and those who proclaim that they can, are delusional and lucky at best.
Discipline
Having a disciplined investment strategy differentiates the professional from the do-it-yourself investor. An investment strategy does not have to be complicated. If you were to sum up Warren Buffett's investing strategy it might be to "buy good businesses at a fair price with the intention of holding them forever." An investment strategy helps provide focus and ensures emotions are held in check when making decisions.
It is like a gym routine whereby you basically train the same body part week in week out. Biceps/Triceps on Mondays, Chest on Wednesdays etc...and for those who do gym regularly, you will realise that you are actually building muscle mass. The same can be said for investing/trading - find a successful strategy and implement it, week in week out and soon enough, instead of your muscle mass growing, your bank account/portfolio grows! It is not magic nor by chance, it is discipline. Let's see how long term discipline investing works in the chart below:
Growth of $1 since 1970 - 2013
Investors are often their own worst enemy as the human brain will start to take over and make irrational decisions - sometimes for the better but many a times, its for the worse.
These are some findings which I found online and I have extracted them as follows:
Anchoring is a bias that causes investors to either hold onto an idea longer than they should, place a disproportionate amount of value on the piece on information they receive, or anchor their perception of value to a specific price point. The inability to fully incorporate new information causes investors to hold onto poor investments longer than they should.
Availability Bias is a mental shortcut in which investors use readily available information and media to make investment decisions, rather than a disciplined research process.
Familiarity Bias reflects an investor’s tendency to invest in the known. Investors may perceive investments they are knowledgeable about as either less risky or more rewarding, and oftentimes both. Typically the tendency manifests itself in investors concentrating their holdings in their own country (a home country bias) or in the stock of their employer.
Herd-Like Behavior reflects the tendency of investors to follow the crowd by chasing the latest investment fad. Driven by greed and fear of missing out, individual investors project past returns into the future and pile in together. The behavior results in investors consistently buying into the most highly valued segments of the market, leading to sub-par results. Herding can also lead to selling at the most inopportune times, making investors their own worst enemy.
Hindsight Bias occurs when events that have occurred in the past look predictable and obvious from the present. Hindsight bias leads investors to overestimate their ability to discern the likelihood of events occurring in the future, causing overconfidence.
An Inability to Control Emotions is common. Most individual investors are easily controlled by two emotions: fear and greed. While everyone would like to “buy low and sell high," very often investors, even very intelligent and well-educated investors, do the exact opposite. They, in effect, “buy high and sell low.” Investors would be wise to heed Warren Buffett’s advice to “be fearful when others are greedy and greedy when others are fearful.” Unfortunately, most investors tend to be fearful at the moment of greatest opportunity and greedy at the time of greatest risk.
Overconfidence is a cognitive bias that causes investors to err in a number of ways, usually with financially damaging results. Overconfident investors are frequently over-concentrated in a specific asset class, sector, or stock. They often disregard the risk and seek out confirming evidence while ignoring any contradicting evidence. More times than not, this increased risk taking is punished with losses. Overconfidence can also lead to increased trading which may result in excessive taxes and fees.
Recency/Vividness Bias reflects a tendency to focus on events that are most recent or easiest to recall because they left a psychological impact. In investing, the event is typically a recent market correction or recent run-up. Since the events are recent or vivid, the tendency is for investors to overestimate the likelihood of the event occurring again and position the portfolio either too conservatively or too aggressively.
A Status-Quo Bias is inertia, or a lack of decision making. In many cases, this is because investors seek to minimize their regret. By maintaining the status quo, they avoid the mental anguish associated with realizing an adverse outcome after making a decision. For example, a regrettable event would be a market rally after selling out of equities or market correction after investing in equities. Unfortunately, this bias can result in investors maintaining the status quo with investment portfolios that are not suited to meet their goals and objectives.
Conclusion
I have always maintained the view that although the smart people do get a head start in life and their career but the "normal" folks can always make it up by hard work and discipline. The smart people can get an A by studying for 1 hour but most people need to spend at least 3 hours to score an A. The end result is the same but the question is - how willing are you to work hard for it?
"with great discipline, comes great returns"!
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