Congratulations to Mark Hulbert on reaching his 23rd year of publishing The Hulbert Financial Digest, an independent rating service that monitors the performance of other financial newsletters. Today he tracks over 160 newsletters. Ironically, some of the most astute advice comes not from the newsletters that he monitors, but from his personal commentary. Here, he shares what he considers the most important lesson he has learned in 23 years.
"When I started in 1980, the Dow was below 900. To
say that the world has changed enormously over the last 23 years would of course
be an understatement. But through it all, certain immutable investment lessons
have emerged. Perhaps the biggest lesson I have learned in my 23 years of
tracking investment newsletters is the crucial role played by discipline. If you
had asked me to list the most important investment virtues in mid-1980, I
doubt that I would have placed discipline on the list. Today, in contrast, I
think it is one of the most valuable traits that an investor or adviser can
have. I define investment discipline to be the strict adherence to a set of
rules and procedures that govern how you will invest. Let me emphasize that
this does mean that we never change our strategies or advisers. On the contrary,
some very disciplined investors change advisers quite frequently. But what
discipline does entail is that we follow preset procedures for how we go about
making those changes. The opposite of investment discipline is being purely
reactive. Investors are behaving this way when they have no overall plan for
their investing, and instead simply react to each new situation or event on a
case-by-case basis.
"One of the reasons that, 23 years ago, I would not have placed a lot of weight on discipline is that it initially seems an affront to our intelligence. Why shouldn’t we take advantage of all that our intelligence has to offer in response to every new situation that arises in the future? After all, we’re not clairvoyant. For example, no matter how wise I might be in anticipating how I should react in the future, there is no way that I—today—can anticipate every factor that would be relevant to making an intelligent decision then. Why tie my hands? This argument carries a lot of weight, and is very seductive. But my experience has taught me that this rationale is a trap. More often than not, those who rely on this rationale are using it as an excuse to react emotionally. To be sure, most of us who are guilty of this do not do so consciously. We sincerely believe that we are objectively assessing and analyzing each situation. But it turns out that our intellects are remarkably weak at standing up to our emotions, even when we think that our responses to a situation are being guided purely by our intellects.
"Think of it this way: If for whatever emotional reason we want to be bullish, we will have no difficulty coming up with "objective" arguments for why being bullish is the best course of action. At the same time, however, those who wish to be bearish will find no shortage of "objective" arguments in favor of their position. Those who have trouble accepting this should come spend an afternoon at The Hulbert Financial Digest offices reading through the latest issues of the 170 newsletters we monitor. You will quickly find, as I have, that at any given time you can find plenty of "reasons" to take virtually any position imaginable. Given the availability of reasons on both sides of every investment, our intellects easily become trumped by our emotions. It reminds me of a line that Adlai Stevenson, the Democratic candidate for President in the 1952 and 1956 elections, was fond of repeating, 'Here is the conclusion on which I will base my facts.' It is safe to say that the world 23 years from now will be as different from today’s as the current one is different than 1980s. But it also is a safe bet that the best way to exploit the opportunities inherent in that change is through disciplined investing."
