Remaining Disciplined In Today’s Fast Paced Markets

5th Street Research

Selecting Quality Investments Can Be Difficult, Keep Things as Simple as Possible

Managing one’s own investment portfolio is a daunting task for most people. The amount of information to process and the speed at which it is made available leaves most individual investors feeling overwhelmed, often resulting in frustration and a few losing trades before deciding to leave the job in the hands of a professional. In reality these “professionals” face many of the same challenges you do and commonly fail to outperform the market as well. The individual investor has a few distinct advantages that the typical money manager isn’t afforded, most importantly the ability to focus your investments in a small group of top ideas and being able to maintain a long-term investment thesis without worrying about day-to-day gains to appease clients. By identifying your own strengths and weaknesses, and focusing your efforts selecting investments within your own areas of knowledge, the individual investor can consistently beat the market once developing confidence in a strategy and learning to maintain discipline .

Find an area of expertise and focus your efforts in a specific niche

Self-awareness is a prerequisite of successful investing. While there are countless strategies you can use, tons of unique financial products you can trade, and a vast array of sectors and companies one could analyze; it is only necessary to find a niche that you excel in and concentrate your time there. If you are a momentum trader don’t spend time analyzing a company’s EV/ EBITDA ratios, you should be scouring through charts of the biggest % movers on the day. If you find you have consistent success picking small cap stocks, don’t spend time analyzing the potential impact of Microsoft’s new Surface tablet on their financials, instead scan though all companies listed on the NASDAQ with a market cap less than $400 million. Have an exotic option strategy that consistently nets small wins?¬†Concentrate your efforts on trading that specific strategy until it no longer works. Having tunnel vision in this sense allows you to filter through the vast array of data and commentary thrown at us everyday, focusing on and employing only on that which is pertinent to your investment methodology. There is much more value in being a master in a specific niche than being merely proficient in a wide array of areas. This is the first component of being a disciplined investor.

Have a predetermined plan when entering a position, stick by your investment thesis

The second principle of disciplined investing comes in the form of being prepared for any scenario that could unfold in your positions before entering them. If you are a value investor your investment thesis is dependent upon identifying companies who are being unfairly valued by the market for any given reason at the time. You should enter into a position only after determining a fair valuation range for the equity based on underlying fundamentals that will ultimately prove stronger than the current unjust market sentiment. Without news of anything that would adversely effect the value of the company, day-to-day or even month-to-month swings in the share price are of no importance until the business achieves a fair valuation or the fundamental picture changes and renders your investment thesis invalid. To have any success as a value investor this thought process is imperative if you hope to avoid cutting losses prematurely and to maximize your returns when your ideas pan out, remaining invested until fair value is reached. Conversely, if you base your trades on a technical strategy it is of utmost importance to adhere to a strict set of rules that are reactive solely to price changes, paying no mind to the fundamental picture backing the position. Before entering a trade you must know where you will cut losses and where you will take profit as predetermined by the technical strategy you employ. Knowing how you should react regardless of what scenario unfolds in a position, and adhering to these principles at all times, takes the guesswork out of investing. Through due diligence in your field of expertise, you identify a trade or position to enter for specific reasons relevant to a strategy you know you can deploy successfully. Knowing how you will exit beforehand takes the human elements of fear and greed out of the equation, allowing only rational actions that ensure the integrity of the strategy and investment thesis.

Always Analyze and Look To Refine Your Investment Methods

The third and most important trait of the disciplined investor is the constant need to analyze and improve upon ideas and strategies when possible. Many investors fall victim to early successes, focusing on the positive results of a trade, rather than analyzing what went right and what could have been done different to possibly capture a greater return on investment. It is easy to get caught up in the power of a bull or bear market and either assume that what you are doing is genius if working, or abruptly lose faith in a strategy that may prove to be great in the long-run if the market initially turns against you. Doing so causes one to miss out on future profits unless sufficient time is spent reviewing and critiquing their trades. Technology has afforded us many means by which we can back-test strategies, test new ideas in live market simulations, share and analyze methodologies with our peers, collect historical records of our trades, and visualize all this information in a way that we can derive meaning from a seemingly endless supply of data. If one hopes to have long-term success as an investor, they must constantly look to refine their thought process and become more proficient in their niche. The world of finance is constantly evolving, to stay ahead of the curve you must do so as well. The almost incessant need to analyze your successes and failures and use this knowledge to constantly improve as a trader is the third and most inherent quality of the disciplined investor.

Putting It All Together

Investing is a life-long learning process we must all go through to achieve financial success. There is no right or wrong strategy to adhere to forever, nor is there a universal methodology or thought process that will ensure outperformance. Take the necessary time to understand what you are comfortable trading, figure out where your area of expertise is, and carve out a niche for yourself. Develop the confidence in your ideas necessary to formulate and stick with a plan before ever entering a position, regardless of what scenario unfolds. Last but not least, always look to analyze successes and failures, and seek out ways to use what you discover to improve future returns. Markets get more confusing and complex by the day, and we are constantly presented with new, seemingly irrelevant data and observations. Only by remaining disciplined and focusing on the information pertinent to you and your investment thesis, can you hope to achieve consistent success. When you find your niche stick with it and master, you will be rewarded in the long-run.

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