“We don’t have to be smarter than the rest. We have to be more disciplined than the rest.” – Warren Buffett

Guess, this is one of the best quotes to emphasise the importance of discipline in investing.

Everyone of us realise this and do strive to better ourselves.

However, the fact remains – it’s easier said than done.

We also know that being disciplined is a key differentiator when it comes to success in investing.

So… we are aware, know it’s importance and continuously try to work on it… but still for most of us the results are far from satisfactory !

Where are we lacking?

Current post is my take on it. Hope you are able to relate.

All of us are well aware about the basic concepts

• Cut the losses, ride the gains
• Operate in your circle of competence
• Be true to your analysis
• Control greed and fear
• Be confident but remain humble
• Respect markets and don’t act arrogant or revengeful etc etc etc

The problem is theory vs it’s application.

We forget, ignore or just can’t relate with them when faced with the real life situations

After screening hundreds of stocks, a stock buy is based on hard work, diligence, research and patience

• A bias is naturally developed towards the stock.
• One only starts seeking the positive reinforcements. Negative developments are coined as temporary or manageable.

Somewhere in the process we lose the discipline of being open, humble and true to our analysis.

An example –

Company with huge unserved domestic demand suddenly announces an international acquisition.

• Before investing into the stock – we may find this confusing, suspicious and hence may not decide to buy into the stock.
• After investing into the stock – we might coin it as small, manageable and hence not a reason to sell.

Same facts, different investing decisions !

When stock moves in our direction, it’s due to our intelligence and when not, the market is manipulated

We are never wrong… are we ?

Be true to yourself and try to recount how many times have you said – I was wrong in my analysis about that stock or I invested in a dud.

On the contrary, I am sure there were many discussions wherein you boasted about how you identified multi-baggers (whether anything significant came out of it is a separate discussion).

Disciplined investors instead like to talk more about their failures than successes. Reason – lessons learnt and how those can be applied in the future investment decisions to mitigate the risk.

Winning stocks make us complacent 

It’s a normal tendency to feel good about the stocks that are doing good, ignoring the losing stocks and therefore compromising on the overall portfolio management.

Winning stocks give us that false assurance that we cannot be wrong – today’s losing stocks will surely become tomorrow’s winners.

Besides, we also tend to comfort ourselves by reiterating that no one can have 100% winners and having losers is part and parcel of a portfolio.

We are very poor sellers

Whether it’s to book profits or cut losses – selling is the toughest decision.

Result – investing discipline goes for a toss.

Why selling is so difficult?

• We become emotionally attached to our holdings.
• We become over confident about our analysis.
• If a stock is increasing – we loose the discipline of fair valuation. ‘Ride the winners’ becomes our go to quote.
• If a stock is declining – ‘Aur kitna girega’ dominates our thought process. Worse – instead of rechecking our analysis, we start averaging down.

Over years, I have also realised that taking 1st step to sell my holding has been most difficult. Once a part is sold, there has been a general tendency to sell the whole position quickly. It’s a sudden shift from an emotional attachment to total alienation.

We keep moving into new stocks

Whereas what may work better is to buy back what was sold earlier.

Business prospects may have further improved or the stock may have fallen to a level where it’s a good buy. However, still many a times it becomes difficult to buy it back.

Reasons –

• We were holding stock at much lower levels in the past. It becomes difficult to buy it at higher levels. We want it to atleast fall to the levels where we had exited earlier.
• Over confidence in our ability to keep identifying new stocks and in the process also prove our intelligence to others. Where is the fun to keep talking about the same 10-12 stocks every time I meet my friends. They should be in awe of my knowledge about different companies and the sectors !

In my personal view, inability to buyback in our old stocks is one of the main reason why we miss on the multi-baggers. Simple buy and hold to ride on them can surely work but may be very difficult to the psychology of an active investor.

Recency bias is a significant deterrent to the outperformance

We extrapolate irrationally based on what we have experienced recently.

Result – we act with the crowd and either buy into hysteria or sell into the panic.

During Covid, when IT got a natural push, all of us assumed it to be a structural change.

Now when inflation is eating into the margins or impacting demand, we again are oblivious to the greenshoots.

I personally have never witnessed great success acting with the crowd.

It doesn’t mean that I have necessarily decided to be a contrarian. However, I have certainly put in some checkpoints to ensure that I maintain calm while acting.

Above by no means is an exhaustive list of situations when we lose our discipline.

It’s only an effort to try demonstrating the point that despite being aware about the importance of discipline, why we act the way we act !

Hope you could relate it with your own experiences.

Other related articles that may be of interest –

Stocks: when to sell?

Why waiting for correction rarely works in the stock markets

Bull and Bear market – same business, different narratives