The Principle: Stick to Your Strategy (Self-control - Discipline, consistency and patience)

 

The Principle: Stick to Your Strategy

The principle of "Stick to your strategy" is about maintaining discipline, consistency, and patience in your investment approach. While there are many paths to success in the market, constantly changing direction is often a direct path to failure.

Here is an elaboration on the critical importance of discipline in your investment strategy.

---

1. Consistency Over Quick Wins

• Define Your Style: Investors generally fall into distinct camps based on their approach:

  • Value Investing: Focusing on buying stocks that appear to be trading for less than their intrinsic value (often characterized by low P/E, P/B ratios).

  • Growth Investing: Focusing on companies that show rapid growth in earnings, even if their valuations are high (often characterized by high P/E ratios).

  • Income Investing: Focusing on stocks that pay reliable, high dividends or other distributions.

• The Danger of Strategy Switching: The article notes that an investor who switches between strategies "will probably experience the worst, rather than the best, of each." This happens because:

  • You buy a value stock, but sell it before the market recognizes its worth because you get impatient (a growth investor mentality).

  • You buy a growth stock, but panic and sell it at the first sign of a price correction because it suddenly looks "expensive" by value metrics.

The best returns from any strategy usually come from compounding over time, which requires consistency.

2. Avoiding the Trap of Market Timing

Constantly switching your approach based on what is currently "hot" effectively turns you into a market timer.

• Market Timing Defined: Market timers try to predict the short-term fluctuations of the market, selling before a crash and buying just before a boom.

• Why It Fails: It is notoriously difficult, even for professional investors, to correctly predict market movements consistently.

  • When you switch from Strategy A (which is underperforming) to Strategy B (which is currently booming), you usually sell Strategy A just before it begins to recover and buy Strategy B just after its peak momentum.

  • You incur trading costs and potentially generate short-term capital gains (taxable) that eat into your overall returns.

• Long-Term Focus: Successful long-term investing focuses on the time in the market (allowing quality assets to compound), not timing the market.

3. The Need for Conviction and Patience

• Strategy Requires Faith: Every valid investment strategy (Value, Growth, etc.) will go through long periods of underperformance. For instance, value stocks often lag behind growth stocks during long bull markets fueled by technology.

• The Test of Discipline: When your chosen strategy is underperforming, the temptation to abandon it and chase the market's current favorite is strongest. Sticking to your strategy means having the discipline to continue executing your plan, even when it feels uncomfortable, believing that your sound fundamental approach will eventually pay off.

• Investment Philosophy: Your strategy should be based on your personal financial goals, risk tolerance, and time horizon. It should be a thoughtful, personalized philosophy, not a fleeting tactic. A consistent strategy makes it easier to evaluate performance and learn from mistakes.

Summary

Sticking to Your Strategy	Switching Strategies (Market Timing)
Focus: Long-term results from compounding quality assets.	Focus: Short-term gains by chasing current trends.
Driver: Discipline, conviction, and fundamental research.	Driver: Emotion, fear, greed, and short-term noise.
Outcome: Consistent, measured returns over a full cycle.	Outcome: Inconsistent results; often buying high and selling low.

This principle is ultimately about self-control. Once you have rigorously developed an investment strategy that aligns with your goals, your primary job is to protect that strategy from the noise and temptation of the market.

The biggest mistake that investors make

The biggest mistake that investors make is not sticking with the plan when the market goes down.

What you do when the market goes down is more important than what you do as it is rising.  WHY?

Because the worse days are followed by the best days.

Manage your emotions

When it is our own money, we think it is math, but it is actually not.  Just because we learn about money in math class doesn't mean it is math to us.  It is actually very EMOTIONAL. 

One of the things that we need to do is manage the emotion, because we do feel the pain of a loss more than the euphoria of a gain.  

Manage the emotion and just keep plodding along, paddling along in the markets for a long time.

Catherine Keating

Global Head of BNY Wealth

Bloomberg Interview

Emotional Intelligence

You don’t need to be a rocket scientist. 

Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ.

This is also what Buffett says. 

Of course, some knowledge about finance is important before investing in the stock markets, but this knowledge alone won’t be of any help to you.

What you also need is emotional intelligence while investing in stock.

Emotional intelligence is the ability to identify, assess, and control your own emotions.

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.

Value Investing: Keep Emotions Out of It

As you evolve your value investing style, keep this in your mind always.


Keep Emotions Out of It


    

The wisdom shared is about avoiding emotional attachments to stocks and the businesses they represent.

If you LOVE Dutch Lady#   , don't invest in it until you like the numbers.  And if the numbers look good and you invest, but they start to look bad later, be able to recognize that.  

Value investors continuously look for the good and the bad and keep their RATIONAL wits about them as they decide to buy and keep their investments.  The purpose of an investment is to achieve a greater financial goal and not to become a "member of the family".

DON'T HESITATE TO ADMIT YOUR MISTAKES.  Value investors admit their mistakes and learn from them.  They take the time to understand what changed (or was overlooked in the first place), and they move on.  

They have a RATIONAL "sell" model and aren't afraid to sell a business when underlying reasons to own it have changed or if the price is way out of line with value.  



# Dutch Lady is a stock in the KLSE.

The Neuroscience of Emotions

Factors influencing Decisions: A Quest for the proper course of Decision-making in Share-investments

Factors influencing Decisions:

A Quest for the proper course of Decision-making in Share-investments

It has been seen for a long time that human being is not always rational and his decisions are not always objective. For instance, if one watches share market, technically the price of a stock should be reflection of its P/E, P/CF & P/BV values, but such is not the case most of times, because the prices of indices are also governed by various aspect and factors of human mindset- expectations, sentiments and excitement to name a few.

This unpredictability of human behavior has led to emergence of a new field in psychology termed as ‘Behavioral Finance’. Behavioral Finance is the study of roles of behavioral factors in the field of finance, especially investment

It is well-known fact that intelligence is one of the important factors, besides hard work and perseverance for achieving success in life. It is generally expected from an intelligent individual to perceive and understand situation properly, think rationally and reason out everything, before making any decision. Clarity of goal, a well-thought strategy to achieve the same, moderate level of motivation, a disciplined behavior with flexibility to reassess the strategies with new developments is certain other requirements to achieve success. This is applied everywhere, in all decisions and goals including individual’s investment decisions as well.

But since human beings do not live in isolation, therefore there are other factors as well which influence his interpersonal relations, and consequently his decisions. Rationality in a man’s decisions or behavior is not always seen as to be expected from them. For instance, people do make different decisions in the two similar situations or behave similarly in two different situations depending upon their emotive state of mind. Thus, emotion plays a vital role in influencing his behavior and decisions. This becomes more apparent in case of investment-related decisions when taken in relation to the share market.

But debate does not end just here. Human beings are not just born for investment; they have other things to do as well. There are numerous occasions when people make mistakes in investment-decisions mostly under the influence of emotions and stress. It is not possible for a person to be totally immune to his emotions, but once he is aware of the risks involved with emotional instability, one can limit the losses. In this context, fear and greed are the most well-known emotions. There is tendency in human-beings to make more money in short time and this tends him to invest in share-market, even when it is at boom. So when market is bearish, the emotion of fear replaces greed. Human-beings love profit, but hate loss even more. A slightly negative indication brings in a lot of negative emotions and consequently, fear comes in. Initially, investor holds position (while rationally, if he wants to quit, he should book losses at that time only) and once the market’s bottoming out tendency to quit gets bigger (though if investor has been rational, he should have waited for a little longer duration and should have stuck to his position). In this way, it would not be wrong to say that not only fear and greed have negative effect on rational thinking, but they also have adverse effects on the long-term strategies of individual. These two unfortunate passions bring in impulsiveness in the individual’s character and continue to press him to take irrational decisions.

Further, Defense-mechanism of denial used by a person to save his self esteem and his ego are also significant factors which prove dangerous in the long run. An investor is, most of the times, adamant to accept that he has made wrong decision. So, he sticks to his decision and end up holding his loosing position longer than what should have been. The anticipation of ‘being wrong’ by any investor, cuts his losses and enables him to take decisions which help him to recover the loss.

Another aspect of Defense-mechanism of denial is its effect on analytical reasoning. Under emotional state of denial, an individual perceives selectively. He tends to emphasize data and information which confirm his position and viewpoint. It also restricts the individual to rationally analyze any new adverse information. Sometimes, it also generates tendency to overemphasize any subtle good indicator and underemphasize the bad indicators, and so, compel the investor to continue with the loosing position, thus aggravating loses.

These factors always influence the decisions of an individual, but the degree of their influence differs. Now, it depends on the individual how he (or she) manipulates these factors for profit. A good investor is one who not only comes out of loss by applying logical thinking but also makes it profitable one. Moreover, one should not stick to his decisions, if situations have changed. The people with low self-esteem and low EQ stick with their decision and apply defense mechanism. False impression of hope leads them to further losses. They even set aside the direction of necessary indicators.

So, to be a good investor, the proper way to act is not simply to book profit at appropriate time, but also to minimize losses in the adverse situations.

’Never Say Die’

http://ansblog.com/2010/02/factors-influencing-decision-making-process/#ixzz0ehyAKUQA

Your emotion controls how many returns you can get

Your emotion controls how many returns you can get

Over the period of investing, common mistakes which I think the investor made can be categorized into few:

1. Data Analysis

2. Emotion

Data analysis can be also sub-categorized to Fundamental / Technical perspective or even Macroeconomic perspective. You can learn from many ways to improve your analytic skills before you made a very good investment. However, emotion plays a bigger part to determine how many returns you can get.

There are various theories which teach investors to buy at a lower point and sell at the higher point. However, due to the greed and fear factor, investors require a very strong self discipline to follow the framework they have set and not to 'Buy High' and 'Sell Low' due to market crash.

There are few players which I conclude as Institutional Investors, Retail Investors & Speculators in this market. When market crash, we will see a huge outflow from the market due to the panic sell. Even fund managers or institutional investors are also forced to liquidate their portions in the markets due to redemption made by the retail investors and caused that their performance will follow the benchmark. Speculators will start "Short"ing the market and tried to earn a huge profits from there and make the situations become worse.


How to control your emotions depends on how your investment strategy/asset allocation works. Most people will reserve an emergency funds for the panic sells purchase. There are also short term investors who just trade during the boom markets and tries to earn a quick profit. There are also long term investors who are fully invested in the market regardless how the market moves upwards or heading south. If you have an asset allocation and portfolio rebalancing plan, you must exercise your plan regardless how your emotion tried to control you to do the other way round.

People who are afraid to see unrealized losses are the one who are also afraid to see unrealized gain. Their mentality is still "Investing = Gambling". If you have this mindset, you will just run away when you earn a bit profit but will quickly cut lose if you see your purchase price is lower than market price.

So, try to control your emotion and learn from the mistake you made earlier. Find a proper asset allocation plan as well as develop your stocks picking skills so that you can avoid to be controlled by your emotion.

Good Luck!

http://www.jackphanginvestment.com/2011/03/your-emotion-controls-how-many-returns.html

The cycle of market emotions

I find this a good depiction of mass human psychology in the stock market. Look at how most of the investors feel when they are riding up a bull run – “excitement”, “thrill”, and “euphoria”! Alan Greenspan would have called it irrational exuberance. It is indeed the greed and behavior of the investors that drove the price up into a self fulfilling prophecy – the share price is going up, let’s invest. The more money gets thrown into the market, the higher the share prices go. The masses continue to do it to a point that no more greed is able to sustain the run.

When the downturn begins, many (denial) investors will want to ‘believe’ they have made the right investments and will continue to ‘believe’ the stock will rebound. Often, they will call themselves long term buy and hold investors when they admit that a short term gain is not realized.

As the downturn worsens, “fear”, “desperation” and even “panic”, create another self fulfilling prophecy – the share price is falling, we need to sell. The more they sell, the more the prices will drop.

So how do you capitalize on market emotions? It really depends on what kind of investor you are. I believe there are 2 kinds of investors that will probably make the best out of such situations.

Value Investing

The first would be the value investors. The point where they are likely to make investment will be between “capitulation” and “depression”, also denoted in the diagram by “point of maximum financial opportunity”. The fact that I stated a region rather than a point is because I believe not all value investors are able to locate the point where market bottoms, and it would be already profitable by buying around the region of bottoms. Thereafter, they will wait out for the next bull run to sell for profits.

It is apparent that the person who came out with this diagram is a value investor since he feels that the maximum opportunity is at the bottom of the market. Trend followers on the other hand, would see opportunities throughout the cycle.

Trend Following

Trend followers would follow the crowd riding up the bull run. The difference between them and the mass investors is that they will liquidate their stock holdings when the market begins to reverse, while the mass investors will still hold on to their stocks. After confirming the downtrend is valid and strong, trend followers would short the market, making money as the stock prices go down. Hence, trend followers are able to make money in both up and down markets, bull and bear runs.

http://www.bigfatpurse.com/2008/12/cycle-of-market-emotions/

Warren Buffett on Secret of His Success (Excellent)

Develop the Value Investing Mind-Set

Value investors must think long term and not think that making a quick profit is their first priority.  You must realize that you won't be investing in the same types of stocks as your friends, and you won't be able to compare quarter-to-quarter returns.

You'll also need to enjoy digging into the annual reports of the companies that interest you and be prepared to analyze everything you see.  Successful value investors are those who enjoy researching and learning everything about a company before diving in and investing.

The key tools you'll need as a value investor are:

• Patience to wait for the market to realize you found a gold mind in a beaten-down stock.
• Discipline to spend the time researching your choices and not get caught up in the mob mentality as people push stocks higher and higher above their true value.
• Desire to learn all you can about choosing the right industries to explore, picking the right stocks within those industries that are unjustifiably beaten down, and then having the courage to wait until the market realizes what a great investment it is missing.
• Ability to check your emotions at the door.  Don't get emotionally involved in your stocks.  Your value portfolio is way to make money.  Don't fall in love with it or the stocks in it.
• Expectation of adequate profits but not extraordinary performance.  Historically the average annual return for stocks in any 20-year period is about 10 to 12 percent per year.  That doesn't mean you'll earn that amount each year:  some years will be higher, some lower, but that's the average return you should expect with a long-term stock portfolio.
• Ability to calculate what a stock is worth, based on careful analysis of the business.  Don't gamble on how much the stock may go up because someone else is foolish enough to pay that.  Eventually, the fools disappear and you could be left holding the bag.
• Ability to think for yourself.  Unless you've found a friend who is also dedicated to the idea of becoming a value investor, don't count on those around you for support.  You must learn to think for yourself.

In the preface to Benjamin Graham's The Intelligent Investor, Warren Buffet writes,  "To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information.  What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

Factors influencing decision making process-Stock Market

Factors influencing decision making process-Stock Market
Nits | Feb 05, 2010 | 0 comments


Factors influencing Decisions:
A Quest for the proper course of Decision-making in Share-investments

It has been seen for a long time that human being is not always rational and his decisions are not always objective. For instance, if one watches share market, technically the price of a stock should be reflection of its P/E, P/CF & P/BV values, but such is not the case most of times, because the prices of indices are also governed by various aspect and factors of human mindset- expectations, sentiments and excitement to name a few.

This unpredictability of human behavior has led to emergence of a new field in psychology termed as ‘Behavioral Finance’. Behavioral Finance is the study of roles of behavioral factors in the field of finance, especially investment

It is well-known fact that intelligence is one of the important factors, besides hard work and perseverance for achieving success in life. It is generally expected from an intelligent individual to perceive and understand situation properly, think rationally and reason out everything, before making any decision. Clarity of goal, a well-thought strategy to achieve the same, moderate level of motivation, a disciplined behavior with flexibility to reassess the strategies with new developments is certain other requirements to achieve success. This is applied everywhere, in all decisions and goals including individual’s investment decisions as well.

But since human beings do not live in isolation, therefore there are other factors as well which influence his interpersonal relations, and consequently his decisions. Rationality in a man’s decisions or behavior is not always seen as to be expected from them. For instance, people do make different decisions in the two similar situations or behave similarly in two different situations depending upon their emotive state of mind. Thus, emotion plays a vital role in influencing his behavior and decisions. This becomes more apparent in case of investment-related decisions when taken in relation to the share market.

But debate does not end just here. Human beings are not just born for investment; they have other things to do as well. There are numerous occasions when people make mistakes in investment-decisions mostly under the influence of emotions and stress. It is not possible for a person to be totally immune to his emotions, but once he is aware of the risks involved with emotional instability, one can limit the losses. In this context, fear and greed are the most well-known emotions. There is tendency in human-beings to make more money in short time and this tends him to invest in share-market, even when it is at boom. So when market is bearish, the emotion of fear replaces greed. Human-beings love profit, but hate loss even more. A slightly negative indication brings in a lot of negative emotions and consequently, fear comes in. Initially, investor holds position (while rationally, if he wants to quit, he should book losses at that time only) and once the market’s bottoming out tendency to quit gets bigger (though if investor has been rational, he should have waited for a little longer duration and should have stuck to his position). In this way, it would not be wrong to say that not only fear and greed have negative effect on rational thinking, but they also have adverse effects on the long-term strategies of individual. These two unfortunate passions bring in impulsiveness in the individual’s character and continue to press him to take irrational decisions.

Further, Defense-mechanism of denial used by a person to save his self esteem and his ego are also significant factors which prove dangerous in the long run. An investor is, most of the times, adamant to accept that he has made wrong decision. So, he sticks to his decision and end up holding his loosing position longer than what should have been. The anticipation of ‘being wrong’ by any investor, cuts his losses and enables him to take decisions which help him to recover the loss.

Another aspect of Defense-mechanism of denial is its effect on analytical reasoning. Under emotional state of denial, an individual perceives selectively. He tends to emphasize data and information which confirm his position and viewpoint. It also restricts the individual to rationally analyze any new adverse information. Sometimes, it also generates tendency to overemphasize any subtle good indicator and underemphasize the bad indicators, and so, compel the investor to continue with the loosing position, thus aggravating loses.

These factors always influence the decisions of an individual, but the degree of their influence differs. Now, it depends on the individual how he (or she) manipulates these factors for profit. A good investor is one who not only comes out of loss by applying logical thinking but also makes it profitable one. Moreover, one should not stick to his decisions , if situations have changed. The people with low self-esteem and low EQ stick with their decision and apply defense mechanism. False impression of hope leads them to further losses. They even set aside the direction of necessary indicators.

So, to be a good investor, the proper way to act is not simply to book profit at appropriate time, but also to minimize losses in the adverse situations.

’Never Say Die’

Read more:
http://ansblog.com/2010/02/factors-influencing-decision-making-process/#ixzz0ehyAKUQA
http://ansblog.com/2010/02/factors-influencing-decision-making-process/

Are You Paying Too Much For Stocks?

Are You Paying Too Much For Stocks?
By Joe Bechtel

Market Value Not Equal to Actual Value

 

If you are a lemming investor, please don't use small loans to finance your lack of creativity. You'll be shocked at how much it can cost you.

A small loan can help you if you are short of cash until your next payday, but if you invest in the stock market and follow the crowd in their buying and selling habits, you may end up with many more liabilities than assets. Why is that?

• Have you ever noticed how much the stock market fluctuates over the course of a day, and how much the share prices go up and down?  
• Does that mean that the companies’ values goes up and down as much as the share price, or does that mean that there may be some other force at work here?

As you will see, the market value of the share does not equal actual value of the same share in terms of a company’s value.

 

Market Price Based on Emotions, Not Logic
One of the pioneers in value investing, Benjamin Graham, believed that many people rely too much on their emotions when investing rather than their logic. This explains why the market fluctuates so much, and why so many people claim that the stock market is risky. What makes it risky is the constant buying and selling that goes on day after day, hour after hour. This constant buying and selling is what either drives the share price up or down, and it’s what creates the risk.

 

Ben Graham suggested in his book “The Intelligent Investor” that if you want to build your wealth from the stock market, you need to use a “dollar cost averaging” technique, meaning to consistently buy more shares at a lower price over time. As inflation and company values grow over time, your investments will be worth more in the long run. It’s also known as the “buy low and sell high” technique. Unfortunately, most people tend to bring their emotions into their investing, and will panic and sell when the price is going down, because they are afraid to lose any more money on their investments, leaving them open to take out a small loan to survive.

 

Beyond the Smoke and Mirrors
The stock market is riddled with confusing terms, acronyms and policies, making it very difficult for the average investor to understand. All this is just smoke and mirrors designed to keep most people in the dark and dependent on high-priced brokers to navigate the investing maze for them. However, if you were to peek behind the curtain, you would see that all the confusion is just smoke and mirrors.

 

Inflated Price? Inflated Value!
In an effort to control the market prices, brokers and fund managers will either buy or sell enough shares to drive the price back up or down, depending on where the prices are going. Maybe it’s because a company got some bad news, or even good news, and investors are trying to position themselves to either make or avoid losing a lot of money. However, this tends to skew the value of the share price, making the market unbalanced.

• Therefore, if a share price is going up too high, brokers or fund managers will sell several million shares to drive the price back down.
• Likewise, if a share price is going down too fast, they will buy as many shares to make it even.

So, if you see share prices inflated, don’t make the mistake of thinking it is worth that much. In fact, they may not be worth much at all!

 

P/E Ratio Tells it All
There is a very simple way to determine if a certain share price is on target or not—look at the Price per Earnings ratio. This is a valuation method that takes the company’s current share price on the market divided by the per-share earnings over a certain time frame, usually one year. So, if a company’s share price is $24 and the earnings per share over the past 12 months have been $2, the P/E ratio is 12. Generally, the higher the P/E ratio, the higher the expectations of investors for company growth. This means that you will be able to see higher earnings within the next year with this company. However, the lower the ratio, the slower the growth regardless of what the market is doing.

 

Buy Low, Sell High
When you can learn how to find the correct value of a company or share, you will know when the share price is at its lowest, and when you can buy. After the share price tops out, you can sell your shares and pocket the difference without needing a small loan. If you do this, you will be able to make money on the stock market when everyone else is losing money.

 

http://personalmoneystore.com/moneyblog/2009/12/08/small-loan-value-investing/

Be an emotion free investor

An emotion free investor would only look objectively at the fundamentals and the valuation of the stock, instead of getting hung up on the entry price.

A crisis mentality among investors

Professionals, even the most seasoned, have the same emotions as everyone else. Learning the ropes professionally does not eliminate human emotion, nor does it elimate urges to buy or sell emotionally. Faced with uncertainties, the tide of emotion surges. How can one resist the surging tide of emotion? Only if one has a framework of disciplines and knowledge within. Controlling emotions and replacing them with the elements of this framework are the secret.