The Secret to Successful Investing: Discipline
By Michael Sincere • Bankrate.com

Every other Friday, we are running an excerpt from Michael Sincere's book, 101 Investment Lessons from the Wizards of Wall Street. This is installment 1 of 26.

Many people, after making the decision to invest in the stock market, aren't sure what to do next. Your first step should be to develop an investment strategy -- a plan that will help you make decisions in the stock market. An investment strategy is important because it helps you find quality stocks. Many people are vulnerable to money-losing tips and poor advice from other investors. With an investment strategy, you will be careful about the stocks you buy and limit the number of stocks you will look at.

Nearly every professional money manager has a set of rules based on a personal investment philosophy or strategy. Ralph Wanger said it best in his book, A Zebra in Lion Country: The 'Dean' of Small-Cap Stocks Explains How to Invest in Small, Rapidly Growing Companies Whose Stocks Depressant Good Values. "If you develop a set of convictions you adhere to, you can turn your back on thousands of stocks and concentrate on a manageable universe. A set of guidelines -- and I urge you to put them down on paper -- gives you confidence when times are rough. It helps you make the toughest decision: when to sell. It makes it possible to get better and better through cultivation of a repeated skill. And it keeps you from the folly of the amateur who leaps from fad to fad, usually just about the time the fad is fading."

If you're new to the stock market, you might wonder how to come up with a set of rules. Believe it or not, that's the easy part. For example, many value investors don't buy a stock with a P/E ratio higher than 15.

Consider developing rules for buying, rules for selling, and rules to keep you out of trouble. For example, you could make a rule to never go on margin, which means you should never borrow money from the stock brokerage to buy stocks.

Martin J. Pring, author of Investment Psychology Explained: Classic Strategies to Beat the Markets, said that rules will not totally eliminate losses, but should help you to trade more objectively.

By relying on a set of rules, you will prevent fear, greed, and hope from clouding your judgment. Pring stressed that no matter how many rules you have, they won't do you any good unless you put them into practice. It's essential that you review your rules regularly, because your financial position and investment philosophy, and market conditions change over time, Pring says.

But it takes more than a strategy and a set of rules to be successful in the stock market. After talking with dozens of money managers and financial professionals, I discovered the secret to being a successful investor. I found out why the best investors make more money, make fewer mistakes, and consistently beat the stock indexes year after year. The secret to successful investing is really quite simple. It can be summarized in one word: Discipline.

Even though successful investors use different strategies, follow different rules, and buy and sell all kinds of securities, the one characteristic they all share is discipline. It doesn't matter if the market is up or down, if interest rates are higher or lower, or if the economy is good or bad, the pros methodically and consistently stick to their investment strategy.

James P. O'Shaughnessy, CEO of O'Shaughnessy Capital Management, came to the same conclusion when he did a study for one of his books. The study showed that the most successful investors never deviated from their investment strategies.

Unfortunately, being disciplined isn't easy. "It's fascinating how simple it is to be a successful investor. But it is also simple to lose weight, to write a book, or to quit smoking. There are a ton of books that will show you how to do it," O'Shaughnessy says. Although the secret to being successful in the stock market might be simple, it's incredibly difficult to be disciplined.

Dr. John Schott, a psychoanalyst and portfolio manager at Steinberg Global Asset, explains what it means to be disciplined: "It means you have a plan and you stick to it no matter what. You have a system that controls your emotions that would otherwise be destructive-fear, greed, anxiety. Every fund manager has a set of rules like that."

Top investors rarely switch strategies and almost never make exceptions to their own rules. If you don't have the discipline to stay with the program, the best strategy in the world won't help you. Robert Rodriguez, chief investment officer of First Pacific Advisers, says the worst investment failures he has seen over the years involved people who didn't stay with one strategy. Even professional money managers occasionally make this mistake, he adds.

-- Posted: June 30, 2000