Universal Lessons From Every Investment Discipline

“Wall Street has a few prudent principles; the trouble is that they are always forgotten when they are most needed.” – Benjamin Graham

Just as there are no perfect portfolios, there are no perfect investment philosophies either. Nothing works all the time and every strategy has its flaws.  Even the most successful investors will underperform the overall market depending on the environment.

Yet 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 could happen 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.

And here’s the best stuff I’ve been reading this week:

  • A dozen lessons from Jim Simons (25iq)
  • How to worry less about money (Brain Pickings)
  • Taxes matter when determining investment performance (Irrelevant Investor)
  • 7 myths that make investors poorer (Cullen Roche via Marketwatch)
  • Why investors should embrace simple solutions (Boomer & Echo)
  • Unfortunately there’s always a sucker in the markets (Reformed Broker)
  • Of course there will be a correction so prepare yourself in advance (Big Picture)
  • Morgan Housel’s first law of financial conferences: “People think they go to conferences to learn something, but most often they go to have their beliefs confirmed and reinforced by others.” (Motley Fool)
  • Why it’s such a great time to be an investor (Vanguard Blog)

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  1. Robb Engen commented on Jul 10

    Thanks for the mention, Ben! I enjoy reading about new investment approaches and strategies, but one that has never made sense to me is technical analysis. I don’t see any evidence that it works and the fancy charts and candlesticks just look like a lot of smoke and mirrors.

    • Ben commented on Jul 11

      It’s definitely not for everyone and provides more of a context than an actual catalyst, but I’d say technical analysis is more suited for short-term traders because it tells you what an investment is doing from a price/volume perspective. How traders use that information when making predictions about the future is up to them.