The Toughest Challenge–Discipline

Once again we find ourselves with a market that generates more frustration than returns. The cover of the current issue of Bloomberg Businessweek expresses the current mood of investors with a very clever visual you might want to check out. A little sadistic humor may help, but what is needed, as always, is a look back at past markets in order to put things in perspective.

As painful as it may be, at the moment, it will be a lot more painful if you fall prey to the siren’s call of “market timing.” What a wonderful world it would be if we could move to the sidelines, before market declines, and back in before the market turns up. It’s very seductive and there is a plethora of newsletters and brokers who will tell you they can see the future. They can’t! They make a living selling subscriptions or earning commissions as investors move money in and out. They would not need your money if they had the ability to time markets successfully.

Market timing is speculating, not investing. But all too often, people fail to understand the difference. Success as a speculator is dependent upon an accurate forecast regarding future prices. (Jon Corzine and Jamie Dimon would no doubt be quick to agree.) It is not the same with investing.

Successful investing is about diversification, discipline, minimizing costs and a proper time horizon. It is not about trying to guess the future. I have always said that if you don’t have at least a 5-year time horizon, you have no business owning equities. Why? Because we have no way of knowing when another 2008 or 2000- 2002, will happen. With hindsight it always looks obvious as to what caused the market to decline but hindsight is of little value. The only way to deal with this uncertainty is to stay focused on your long-term goals, and that requires discipline.

You can look at every bad market in the past and see the losses suffered by people who got out when the market was down, and waited until the market recovered to get back in. Look at the market over the past three years, a perfect example. It’s crazy, but that is what happens when emotions drive investment decisions.

And think about this—if you get out of the market today, in order to mitigate your stress and fear, ask yourself how long it will be before you feel the stress of trying to decide when to get back in the market.

2 Comments

Filed under Investments, Investors

2 responses to “The Toughest Challenge–Discipline

  1. Great advice during a murky market. Dicipline cannot be overrated!

  2. Always refreshing to hear words of wisdom amidst a sea of, as Eugene Fama put it recently in Chicago, “noise”. Paralleling your words, Dan, Mr. Fama’s words to us were, “It’s not about noise. It’s about the underlying investment philosophy.” This is what we need to instill in the minds of those we serve. Thanks for your work!

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s