Thursday, July 12, 2012

Discipline vs. Conviction

Jim Yih wrote an interesting article about the importance of discipline over conviction when it comes to financial success. He says “most investors think that investment success comes with conviction or intuition when really the thing that matters most is discipline.”

I agree with Jim, but the problem is that investors who make the most money quickly make their fortunes with conviction and intuition. If a thousand investors each take a wild chance and pour all of their savings into their favourite stock, a few will make a fortune. Of course, most of them will end up with far less than someone who chooses a well-diversified portfolio, but the few lucky ones stand out.

There is a parallel here with lottery tickets. A huge majority of lottery players lose money over their lifetimes. But a lucky few strike it rich, and these lucky people are very visible. It’s obvious that buying lottery tickets is a poor financial move, but it is less obvious that relying on conviction and intuition in investing is also a bad idea for most people.

Lottery advertisers like to tell us that you can’t win if you don’t play. It’s the same with high-risk investing: if you don’t take a big chance, you can’t get rich quickly. But you’re still better off trying to get rich slowly by sticking to boring things like a sensible asset allocation, diversification, low fees, and rebalancing.

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