SCOTT REED: Rule No. 38: Discipline is rewarded

SCOTT REED

My daughters are tennis players. They both hit their first balls when they were young, around 4 years old.

Hitting balls for fun is one thing, but in recent years they have both decided to play more competitive tennis. Both are on their high school tennis team, the oldest on varsity and the youngest on junior varsity.

Competitive sports is a different animal. A lot of people say that winning is everything in competitive sports, but I don’t think that is true. If you are winning at everything you aren’t really getting better, are you? In order to get better you have to play better competition. You can’t do that and win all the time.

I am excited when they are able to lose and then tell me what happened and what they learned from it.  Then I know they are growing and getting better. There is only one No. 1 player in the world at any time and the rest of us are apt to lose at any time. Even more importantly, I think, is the fact that losing makes you appreciate winning so much more. The thrill of victory is so much sweeter when you know the agony of defeat.

The point is that the down side of things often serves a great purpose in your pursuit of success. It is no different in the investment world. Volatility is a good thing. It is the only thing that provides us with the opportunity to succeed.

The idea that your investments would go up every year is a nice thought but it doesn’t work in practice or in theory. Markets are created by bringing buyers and sellers together. The buyers think that prices are too low at the same time that the sellers think prices are too high. If the markets were to go up every year, then there would be no reason to sell for most owners of securities. If there were no sellers, there would be no market.

Down markets provide opportunities for investors just as up markets provide opportunities.  Greed and fear, the two biggest drivers of market movements, can only exist in a volatile environment.

A critical key to success in the investment world is to embrace and understand the volatility of the markets and use it to your advantage. That is easier said than done, but just because it is hard doesn’t make it less true.

Faith in the consistency of the majority to be wrong and force markets to move more than they should can bode well for the patient, methodical investor. A healthy dose of fear in an up market and greed in a down market can be a very good thing for your investment portfolio even though your heart wants to do just the opposite.

Ben Hogan, the golf legend, once said, “If your golf swing feels good, you are most likely doing something wrong.”

The same can be said about investing. Even though most of the investors I talk with would prefer a sure and consistent thing, the better route is to embrace the volatility, understand it and use it to your advantage.

Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or sreed@hardyreed.com

Recommended for you

Load comments