Peter Drucker said a lot of great things about managing businesses and companies. But he got one very big point wrong when he said “If you can’t measure it, you can’t manage it.”
In finance you can measure just about anything. Returns are compared across stocks and asset classes every second of the day. We can measure sharpe ratios, MERs, volatility, options skew, put/ratios, volume, PEG ratios, highs, lows, price earnings ratios, dividends, yields, and buybacks (just a short list). Diving deeper into financial statements provides a near endless array of quantifiable data on top of that. And with all that data, surely someone will come out on top.
But the market is not a measure of who has more data. In the public markets, we all have access to the same corporate information.
The market is not a measure of who’s smarter. Buffett once said that an investor with an IQ of 150 should sell 30 points to some else.
The market is not a measure of who’s faster. There will always be a computer that parses the news or data and enters a trade before you finish blinking.
The market is not a measure of who’s math is fancier. Some of the fanciest math ever applied to finance nearly took down the financial system in 1998.
The market is a measure of who’s disciplined.
Disciplined meaning who acts with greater purpose, dedicates finer attention to strategy, and is unwaveringly process-driven over the course of their investing. It is being stubborn enough to cut out the noise and the naysayers in the bad times, and the gladhanders and cheerleaders in the good times.
But ironically, discipline is the one thing you can’t easily measure in finance. There’s no one piece of data that says one person is more disciplined than another. Discipline accrues over the long run and can only be discovered over the long run. Yes, long term track records tend to point you in the right direction, but it’s not until we know why that track record exists that we can understand the role discipline plays in getting there.
In periods of volatility, when they need it most, it is discipline that goes out the window first for most investors. Very smart people can start doing silly things, fast thinkers can freeze in their boots, and people with fancy math can get blindsided by simple truths. The investor who can manage their discipline through the volatility achieves the greatest longevity, and enjoys the fruits of higher returns.
You’ll notice that of all the investors on the Forbes 500 list, not one got there because they picked a good time to invest, or picked the right time to sell, or got a hotter a tip than their neighbour. They’re not smarter or faster than anyone else either. All that really separates their annual returns from average investors is they don’t stop in the face of adversity. So we won’t either.
Ben Kizemchuk is a Portfolio Manager & Investment Advisor with Altus Securities Inc. in Toronto. He offers financial planning and investment management for high net worth Canadian investors. Ben focuses on high quality investments, the Growth and Income Portfolios, low risk investing, and reducing tax.