Friday, July 11, 2014

Lessons from Every Investment Discipline

Ben Carlson just wrote an interesting piece, titled above. In it, he took the best lessons that he found from each investment discipline and adapted it to how it can be used for all types of investors, whether you believe and use that discipline.

"...each form of investing has lessons that can be used regardless of how you choose to invest.
While I think there are certain investment strategies that increase your probability for success, different styles suit different personality types. And if you think about it, if every investor used the same exact process the markets wouldn’t function very well.
Even if you don’t use or agree with other investment philosophies, each one has characteristics that can be applied to anyone’s portfolio no matter how its structured.
What follows are some of the most well-known investment disciplines along with a lesson or two from each that every investor should be able to use in their own strategy.
Focused Value Investing: Buying stocks that are underpriced in relation to their intrinsic value.
Lesson(s): It’s important to invest from the perspective that stocks represent an ownership interest in a business. You get your share of corporate profits from the stocks you own and over the long-term the value of the business should be reflected in the stock price.
Quantitative Investing: Using a systematic, mathematical approach to make buy and sell decisions within a portfolio.
Lesson(s): A rules-based, objective approach to investing is a great way to take out the emotions which can trip up so many investors and introduce biases into the investment process. Automating good decisions can reduce costly mistakes.
Technical Analysis: Studying charts, past prices and volume for security and market analysis by using patterns.
Lesson(s): An understanding of the history of the financial markets is extremely important to be able to define your tolerance for risk and gain the correct perspective on what couldhappen in terms of gains and losses. And at the end of the day markets rise and fall because of supply and demand.
Index Investing: Owning the entire market/index at a low cost.
Lesson(s): Beating the market is hard. Keeping your expenses, activity and turnover to a minimum is a prudent way to earn your fair share of the market’s return over time.
Asset Allocation: Investing in a diverse set of asset classes, markets and sub-strategies within each asset class through different portfolio tilts.
Lesson(s): It’s impossible to predict the best performing asset class over shorter time frames so it makes sense to diversify, own them all and periodically rebalance by selling some of your winners and buying some of your losers.
Trend Following: Using the direction of the markets to make buy or sell decisions by entering when an uptrend is established and exiting when that trend is broken.
Lesson(s): There will always be a market, sector or asset class that is performing well and some that are performing poorly. Also, risk management is one of the keys to your long-term survival in the markets.
Risk Parity: Ray Dalio’s diversified approach of allocating investments by risk (defined as volatility) to account for different economic scenarios.
Lesson(s): It’s impossible to predict which type of environment we will be in with regards to growth, inflation and interest rates so it makes sense to own different investments that each perform well depending on the economic situation.
Trading: Making short-term bets on the direction of the markets and individual securities.
Lesson(s): Defining your threshold for for losses helps set the proper expectations for downside performance (most traders set acceptable levels of loss in their holdings). Plus, an understanding of the fact that markets can be extremely volatile, as traders try to take advantage of short-term volatility, is something every investor must be aware of to keep their composure.
- Ben Carlson"
Anyway, this is just some quite general and reasonable thinking that most investors can apply to their investment philosophy. Buy low, sell high. Diversify for safety. Don't be emotional. History gives guidance.

Good luck out there guys.

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