What Is Disciplined Investing?

At High Rock we consider ourselves to be "Disciplined" with our investment process and while I often refer to various concepts for our approach in this blog, I thought it might be worthwhile to  review the philosophy behind those concepts. 

This is a philosophy garnered from experience of more than 30 (55, if you include our joint efforts) years of formal education, investing, trading and helping others to achieve their goals.

1) Investing is for the long-term.

• It is about creating a strategy to achieve our financial goals and objectives over the course of our lifetime (and perhaps beyond if we wish to leave something to a beneficiary).

• We cannot have an investing strategy if we do not know what we are trying to accomplish.

• Make a plan and stick to it: do not get caught up in the day to day "noise" of the market.

• Periods of market insanity never last forever, whether it is extreme optimism or pessimism, markets will return to the mean over time: periods of out-performance will be followed by periods of under-performance.

• Everything has a cycle: different asset classes will perform differently at various times throughout the cycle and a balanced and well-diversified portfolio which contains many different asset classes will have significantly less volatility (and better risk-adjusted returns) than one that is skewed to a single asset class.

• Otherwise, we are gambling. Gambling is not investing.

2) When there is new cash to invest we need to be aware of where we are in the longer-term cycle.

• We need to fully understand the economic fundamentals upon which the current market is based and the probabilities of what it may lead to next.

• We have to gage the "psychology" of the market: the general public buys most at the top because the positive "noise" (media, etc.) is loudest and sells at the bottom because the negative noise is loudest and the pain is the greatest. Human beings are conditioned to avoid pain.

• Human emotion is the greatest enemy of successful investing: fear and greed are stronger than long-term resolve.

• We need to be independent thinkers and not be afraid to be contrarian: when all the "experts" agree, something else is going to happen.

• With all this considered we can then pick the appropriate price points for making new asset purchases.

3) Regular re-balancing takes the "guess-work" out of the timing for buying and selling:

• As I stated earlier: different assets perform differently through the course of the economic or investment cycle.

• An out-performing asset will become "over-weight" (as a percentage of the total portfolio) which tells you when to sell what is the excess to return to the strategic weight.

• An under-performing asset will become "under-weight" and the "profit" from the sale of the over-weight asset can be used to purchase the necessary amount of the under-weight asset.

• Over time, this adds significant value by further compounding growth.

4)  The costs for investing can detract from the growth over time.

• The difference between paying 2.6% (all in) and 1.3% could cost well over $1,000,000 over 30 years (on a $1,000,000 portfolio now).

• Transparency of all costs must be available, at all times.

• Not just the fee, but the other "embedded" costs.

5) There can be no conflict of interest.

• In other words, any interests (be they financial or personal) cannot be put in front of the investor/client interests. That is the fiduciary duty that holds a portfolio manager / advisor accountable.

Next blog:

How has discipline been good for us this year?