Many investors try to outsmart their peers to generate relatively high returns. For example, they may develop a complex investment strategy that has the potential to provide them with a competitive advantage.
However, the importance of intelligence in generating market-beating returns may be overestimated by investors. Certainly, having a sound investment strategy and obtaining detailed industry knowledge can be very helpful in obtaining high returns. But discipline may be just as, if not more, important in the long run.
A disciplined approach to investing
The importance of discipline has previously been discussed by Berkshire Hathaway (BRK.A, Financial) (BRK.B, Financial) chairman Warren Buffett (Trades, Portfolio). As he once said: “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
In my view, Buffett’s views highlight a key reason for his success as an investor over recent decades. He has used a strategy that is extremely simple, in terms of seeking to purchase high-quality companies when they trade at fair prices. Moreover, he has not used complicated algorithms or formulas to value businesses or to determine whether they have a wide economic moat.
However, he has implemented his strategy with extreme discipline. This has allowed him to avoid any opportunity that he does not fully understand, in terms of assessing the company’s business model, and walk away from any stock that is overvalued. In addition, it has enabled him to cast fear and worry to one side during periods of market turbulence to buy stocks while many of his peers were doing the opposite. This has allowed him to access buying opportunities that many investors frequently fail to capitalize upon.
Application in the real world
Of course, Buffett’s disciplined approach to investing sounds simple in theory. Implementing it in the real world is likely to be far more difficult, judging by the large number of investors who fail to persist with their strategies through the market cycle.
In my opinion, discipline is a character trait that can be difficult to acquire. Some people naturally find it easier than others to ignore their emotions and stick to a plan over the long run.
However, all investors can take steps to improve their discipline over time. For example, they may create an investment checklist that forces them to rely on specific facts and figures when managing their portfolio. This may help them to become less impulsive and to maintain their strategy through different market conditions when emotions may be guiding them in a different direction.
In addition, investors may find it easier to remain disciplined if they adopt a simple strategy such as the value investing style that has been used successfully by Buffett. Its long and profitable track record over many decades may make them more likely to stay the course – even if, at times, they are tempted to do otherwise.
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