Discipline – a key trait when investing

Whoever invests is in it to make money (clearly not to lose money). Let’s be frank about it. Be it an investment in a simple money market instrument and/or a bank term deposit, a short term investment (in the form of a trade whose aim is that of making quick easy money) or a trade for the longer haul (such as an investment in a fund, bond or equity or a combination of either), preservation of capital and making money should be at the forefront of any investment decision.

Taking informed decisions, both for the seasoned and amateur investor is of paramount importance; to read, research, be interested and most importantly take that initiative of knowing where their own hard earned money is being invested. More importantly, becoming accustomed to which factors could impact the value of an underlying investment. It is important to get to know the key market forces, the way markets operate, political and geopolitical events, ongoing global economic conditions, interest rates, growth rates, understanding the operations of the individual companies where investor money is placed as well as knowledge on how to analyse company’s financial performance over a period of time.

All of these factors, to name a few, both on a micro and a macro level, will, in one way or another, determine the value of an underlying investment. In simple terms, a value of an investment is determined by the basic economic concept of demand and supply; inevitably all of the above factors impact the demand and supply of, for example a bond or an equity, so it is imperative to be aware of how market forces, when combined, can impact the price of an investment.

The next thing an investor needs to have, after getting a good grasp on the nitty gritties of the modus operandi of markets, is build his/her own investment discipline. This is no mean feat, especially when people’s money is involved. One of the hardest things to learn and achieve in this industry is separating emotions from investment decisions, but it is ultimately what distinguishes one investor from another. Discipline can come in a number of forms, be it from sticking to investment horizons, patience, investing within an investor’s risk profile, but one of the most important types of market discipline comes in the form of knowing when to take a profit home. Put simply, it is when to know when to shy away from an investment and take a painful loss and call it quits, acknowledging that things might not have gone as originally planned, the ones which place invested capital at risk.

Market discipline can only be enforced if there is a devised plan in place, and that plan is strictly adhered to. Whether it is a short term trading position, or a longer term core holding within a portfolio, every investor ought to know a-priori what to expect from that investment, what returns are expected, what level of risk is undertaken, and the time horizon for that investment to reap its dividends.

Monitor your investments. Get to know what you are investing in (and where your money is). Devise a plan. Set goals. Analyse your exposures. Filter out the winners from the losers. Monitor your portfolios and how external forces are impacting the overall value of your portfolio and whilst you are at it, revisit your plan. Challenge it, the criteria, and the assumptions that were built around the plan. Have your objectives been met or have they fallen short of expectations? Are you overexposed to a company, sector, and country or asset class? Are things going as planned? Have you set price targets and stop losses? Where are your investments vis-a-vis those levels? What course of action do you intend taking if the value of one of your investments goes above (or below) those levels and does it fit in with your original plan?