Philosophy, Strategy and DISCIPLINE There’s a lot to learn from the most disciplined investors, those who have already visited the Pearly Gates.

by Bo Billeaud

Over the course of the last 50 years, how many investment truths, wisdoms and fads have sucked people in, led them to within sight of the promised land, only to then turn, betray their trust, stab them in the back, drain their bank accounts, run off with their wife and burn their portfolios to the ground? So many. It’s a chore just to keep count. Yes, a sucker is born every day.

Recall the “nifty-fifty” (must own) stocks that commanded “no-price-thatwas-too-high-to-pay” in the early 1970s (the brutal two-year 1973-1974 bear market injected a dose of reality into that fad), the “portfolio insurance” strategies of the mid-1980s (which led to the one-day 27 percent crash of 1987), the Internet IPOs of the late 1990s (which subsequently fell an average of about 85 percent when that party ended), or the no-doc, no-down-payment, flipping real estate game that led up to the front steps of the housing crash in 2008? These plans were all so cool until we realized they actually weren’t cool at all. They all were beautiful theories that ultimately were mugged by gangs of brutal facts.

Chasing rainbows. Why do people do it? Because everyone wants something for nothing. It’s human nature to want a short-cut. Instant gratification. It’s tough slogging it out with the tried and true in the trenches. And, because it’s tough, there is always the temptation to circumvent the investment principles that likely will lead to success.

Who ever said it’s supposed to be easy?

Successful investing principles may be simple (How do you lose weight? Eat less, exercise more), but they are definitely not easy. To quote Warren Buffet’s more philosophical half, Charlie Munger, “It’s not supposed to be easy. Anyone who thinks it is, is stupid.”

In my opinion, there are three fundamental concepts needed to tilt the odds toward success: philosophy, strategy and discipline. Like legs of a stool, all three are needed.

Philosophy is the big picture ideal that holds it all together. Without an underlying philosophy, it’s impossible to implement a successful investment strategy, much less stick to it when the markets are in turmoil. Philosophy can be as simple as prudently owning a broadly diversified portfolio. Strategy is how you implement your philosophy, which leaves us with the third, and by far, the most difficult leg to master — discipline.

It is a well-documented investment fact that we are often our own worst enemy when it comes to investing. For example, every dollar invested in an index fund that mirrored the S&P 500 stock index 30 years ago would have grown 25 fold. Of course, to get that result, you would have had to have been virtually catatonically asleep at the wheel, holding tight through the crash of 1987, the savings and loan crisis of the late 1980s, multiple wars and terrorist attacks and finally the financial collapse of 2008. All possible, but terribly difficult to do, which explains the “Behavior Gap’s” miserable performance shortfall experienced by so many over the last 30 years (see my July 2014 ABiz column “Saving Us from our Own Bad Selves”).

So, in my opinion, outside of dumb luck, discipline makes all the difference, as does a lack of discipline, which looks like this:

It should be more than obvious that the above (bad) behavior, typical as it is, is not the way you want to go.

I can’t stress this strongly enough. You’ve got to be in an investment program that you understand and philosophically agree with. It has to make long-term, economic and fi nancial sense so that you can fi nd the courage and discipline to stick with it through thick and thin, which will surely come again, as it always has. To do otherwise will lead you down to the road of perdition — a roller coaster ride of portfolio destruction.

Just to drive the point home, let me reference a news item that received quite a lot of industry buzz last spring. It seems that Fidelity Investments conducted an internal audit to determine what types of investors received the best returns during the 10-year period of 2003 to 2013. There was absolutely one group of investors who consistently beat all others. And they all shared one common characteristic. They were dead. Yep, dead. It seems that despite any other obvious shortcomings, dead investors at least mastered the art of discipline when it comes to their investment portfolios.

Since you are presumably not yet dead, if you feel that you don’t have the temperament or wherewithal to structure and maintain a proper portfolio that fi ts your situation, then by all means, fi nd an adviser to help you with this task. But, a word of warning — not all advisors are created equal. There are good advisers, and not-so-good advisers. So be sure that you select one who has these three qualities: integrity, intelligence and energy. Pay special attention to the order of these attributes. As Warren Buffett has said, if they don’t have the fi rst, the other two will get you every time.

Bo Billeaud has served as president and chief investment officer of Lafayette-based Billeaud Capital Management for three decades.