Billionaire investor Warren Buffett is as renowned for his homespun wisdom and memorable quotes as he is for his stock-picking success. Most investors can probably reel off several sayings, but here’s one you don’t hear that often: “We don’t have to be smarter than the rest. We have to be more disciplined than the rest.”
D is for discipline
I can see why that one is overlooked, it’s not as instantly satisfying as old faves like “Only when the tide goes out do you discover who’s been swimming naked” or “Our favorite holding period is forever.”
Discipline is out of fashion these days. People see it as tiresome, uninspiring, bothersome. It reminds them of school, in the days when schools did discipline. Also, the word begins with a ‘d’, like lots of other drab and dreary words, such as dull, difficult, dogged and demanding.
That’s why so many investors overlook its importance, but not Buffett, which is just one reason why he is so successful. So what does he mean by that?
D-day
First, it’s good news. You don’t have to be an investment genius to make large sums of money on the stock market. What you really need begins with a D.
Discipline means you have to master your emotions and, in particular, the two most dominant ones when it comes to investing – greed and fear. Mastering your greed means resisting the temptation to chase investment bubbles. or last year’s winners, while curbing your fear involves fighting the urge to dump stock in a market crash.
It also means you need to keep pumping money into the market, year after year, decade after decade, even when you’d prefer a more immediate hit from, say, a daily frappuccino, a night slamming cocktails, an extra holiday or two, or the million and one other ways money slips away.
The D-word
One way to instil discipline is to set up a monthly investment plan so you pay a regular sum into the market, straight after payday. After a while, you shouldn’t even notice the money leaving your account.
Let’s say you are disciplined enough to invest £200 a month in a tax-free Stocks and Shares ISA. Then you double down on that discipline, and increase your contribution by 5% every year. After 30 years, you’ll have £422,476, assuming stock markets grow at their average historical rate of 7% a year. If you stick with it for 40 years, you will have £1,018,786.
Gimme a D
Discipline also means building a balanced portfolio, rather than racing into one or two stocks that catch your eye. You could, for example, start with these five FTSE 100 stocks, and take it from there. Or keep it simple with this FTSE 100 tracker.
You then need to stick to your plan and avoid being knocked off course either by bull or bear markets, which also takes discipline. If this sounds demanding, then maybe it is. That’s why “the rest” can’t be bothered. Buffett can.