Have the Discipline to Say No

1.  A particular security is selling in the market for $25 a share.

2.  The strong fundamental qualities of this security are well known, and as a result, the stock has typically traded at a fair to overvaluation.

3.  At the current price of $25 a share, the stock is indeed slightly above fair value.

4.  Eager to buy, an investor is on constant watch for any dip in stock price, but the dip never comes.

5.  Instead, over the next few weeks the stock seems only to go up in price and is now at $35.

6.  Not wanting to miss out on the continued rise, the investor rushes to buy in.

7.  In the next few weeks, the stock is back at $25 and the investor, an able and bright fellow, feels like the dumbest man on the planet.

8.  His downfall had nothing to do with intelligence.

9.  Instead, it had everything to do with emotions dictating the investment decision.

10.  Whether the security will trade above his purchase price a year from now is irrelevant.

11.  Even if that happens, it's just foolish to dismiss the investment as an intelligent one because the investment process was manipulated by emotional decision making.  

12.  Next to taking a loss, nothing is more painful than the aforementioned chain of events.

13.  Learning to say no until the price is right is of paramount importance.


Referring to the above example, the ultimate failure (or success) of the investment decision was not based on intelligence but on emotion. The investor could not allow himself to "miss" the continued rise in the price of stock.  Disregarding any fundamentals whatsoever, he made the assumption that because the shares had continued to go up for weeks, they would continue to do so.  What is important here is not the investment performance but rather the process employed to make the investment.

Discipline is what separates sensible market loss from foolish market loss.  If you are disciplined and your approach to investment is sound and businesslike, your winners will more than compensate for your losers.  The undisciplined investor is the one who racks up losses similar to the example given earlier.  Succumbing to investment losses in this manner can mean the difference between an above-average and a below-average investment track record.

In cases like this, be disciplined enough to walk away and search elsewhere.  Always remember that any business is undervalued at one price, fairly valued at another, and overvalued at yet another.  The intelligent investor's goal is to buy at the undervalued price, avoid at the fairly valued price, and sell at the overvalued price.  Only by maintaining a very disciplined approach can this strategy be carried out effectively.