I CANNOT undermine the tremendous value of discipline. Principally, I want to be disciplined, I do indeed try, but at times I falter. Sometimes for extended periods of time, and regrettably for no specific reason. My portfolio too, often is a victim of my indiscipline and I have to face the long term consequences on my wealth. Talking of discipline, in the investment space in India, you can now find fund managers who offer a relatively new style of investing. Globally, it has existed for over two decades and more often used in the institutional space.
The style is a lot more disciplined, more regimented than the traditional (or fundamental) style that equity funds in your portfolio today are most likely made of. It is called the 'quantitative' style of investing.
At a very simplified level, quantitative managers develop mathematical or statistical models using historical data to establish correlations between tens of factors that could have influenced the price of a stock in the past.
Managers go back 7-10 years and more in time while researching, aiming to enrich their models with as much knowledge of events as possible. The objective is that if any of those events occur in the future, they would be well prepared for it. It's similar to doctors leveraging the experience and knowledge they gain over years of practice to stay ahead of possible worse scenarios for a patient's health or even his chances of survival.
The discipline bit comes in once a model is thoroughly researched and ready, the fund manager then lets it take over. Emotions, opinions and behavioural biases then have no place. It's a discipline then. A regimen. And under normal circumstances, the fund manager will not interfere in the decisions the model takes. Of course, he will watch it very closely to ensure that if there are new events occurring (e.g. in medicine, a new type of cancer cell is discovered); the model is constantly enriched and upgraded with such knowledge.
As an example, several fundamental equity fund managers driven by sentiment were holding very high levels of cash (25-40%) in their funds after the 2008 crisis. In the same scenario, it was not unthinkable that a quantitative fund manager would have simply not raised his cash levels or just continued to stay invested in the market. In May 2009, when the Congress won with a thumping majority and the market rallied nearly 20% on one day, a fundamental manager arguably would have taken longer to lower his cash holdings, thereby not taking maximum benefit of the rally. A quantitative manager would have instantly benefited at and even after the market began its unstoppable 18-month climb.
The case I make is not to substitute your fundamental holdings for quantitative managers, but begin to add in small proportions a quantitative manager to your portfolio for sure. Add a bit of disciplined investing.
It's the same analogy that you don't always want a typical Mumbai traffic cop to switch off the hopefully well-'modelled' traffic lights sequencing and take full 'emotionally driven' control of traffic at a busy junction. You agree that much discretion is probably unproductive. At the same time, you don't need a traffic light at 3 am that forces you to keep waiting though there is no traffic. So have a combination of both – a bit of discipline and a bit of emotion!
So do consider buying a bit of discipline for your portfolio! It's a must.
Happy Investing!!
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