Value Discipline

What should you reward or recognize an advisor for? Poll investors and you will get an overwhelming verdict favoring returns. Most investors believe the only reason they need an advisor is to give them more returns which they dont have the time to find themselves. The advisor is meant only to give them performance.This leads to several judgemental biases that follow. Firstly, investors believe that the advice is needed only at the time of buying. If the buying decision is right, then they think that the course is set. Secondly, they feel that there is not much for an advisor to do once an investment is made. Essentially, investors undermine the importance of an investment process. While, choices are important, there is much more to investing than choices. Choosing not to buy what is popular is a difficult choice. Most investors are unlikely to pick that option. Only disciplined advisors are likely to tow that line. Choosing to buy what is out of fashion is an even more difficult choice. Few people will do it. Especially so, when these unpopular choices need to be made in the face of adverse circumstances. But, the most experienced investors get their extra returns largely from difficult decisions. To get these decisions right, they have a solid investment process that they build, fine tune and develop over years. Good advisors should be able to lend a sound process to the investor. This would enable them to benefit from a positive investment experience, enhance their belief in equity as an asset class and to believe in process driven investing. This brings us back to the opening question. What about returns? Often, returns are taken on face value. If investors fail to see if the returns are generated through disciplined investing, there is a high probability of loss of capital. Remember, huge positive returns in tech, infra and power funds in 2000 & 2008, turned into massive losses in just 12 months. Returns never tell you the true health of your decisions. Discipline is a far bigger attribute than returns. When investors value returns over discipline, losses are bound to follow.

 

“Everyone finds the right conviction. When one finds it really matters.”

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