Reto R. Gallati - Investment Discipline: Making Errors Is Ok, Repeating Errors Is Not Ok.

Investment Discipline

Making Errors Is OK,
Repeating Errors Is Not OK.

Reto R. Gallati

Copyright 2012 Reto R. Gallati

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ISBN: 978-1-4525-5277-4 (sc)

ISBN: 978-1-4525-5278-1 (hc)

ISBN: 978-1-4525-5276-7 (e)

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Balboa Press rev. date: 7/12/2012

Contents

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Through the process of writing this book, I was fortunate to receive tremendous feedback from numerous colleagues and friends. I would like to take the opportunity to thank a few individuals in particular who encouraged me to publish my manuscript and make my thoughts available as a hard copy and ebook.

Celeste Cagnina has endured many evenings and weekends when I worked on this book. Without her love and unconditional support, I would not have finished this new book. Jeff Skelton, a dear friend and former colleague with vast academic and practical experience, was an invaluable sounding board throughout the process. Maurizio Ferconi, my good friend, who never hesitated to show me my errors along the way as they are obviously all mine! Stefan Riesen, my friend with whom I have shared my joy and pain as an investor since we met at Goldman. Finally, my editor Michael Whatling from McGill University, for his patience and diligence with bringing this manuscript to its highest quality.

Many highly-paid investment gurus, with a straight face and a gleam in their eye, will insist that successful investing is a function of painfully collected experience, expansive research, skillful market timing, and detailed technical analysis. Others emphasize fundamental information about companies, industries, and markets. Thats what they tell you.

I say the ingredients for a successful investment portfolio are these: stubborn belief in the quality, diversification, growth and long-term principles from Investments 101, and operations that employ the planning, leading, organizing, and controlling skills introduced in your grad class!

So, what is this book about? This book contains no secrets and no magic equations. It tells you about the most common mistakes (including my own personal errors), and provides advice on how to avoid these errors in order to become a successful investor. Key ingredients are patience, willingness to learn, some homework to understand your investments, and to top your investment process discipline.

To some people, investing is a mystery, an unpredictable world of formulas and strange terminology. Others will tell you that it is simply a matter of luck that depends on a hot tip or picking the right investment at the right time. These perceptions are common, but they are generally wrong. In fact, the principles of long-term investment success are available to anyone.

This book will guide you in your decisions from setting up your investment objectives, research, and buy/sell transaction, to adjusting your portfolio to achieve a long-term return that matches your personal objectives.

Famous investment professionals, such as Warren Buffet and Peter Lynch, have made mistakes, but they did not repeat them. They held on stubbornly to their investment approach, and showed discipline over a long time period resulting in superior returns. Obviously they were lucky as well, however they played the numbers right, and over time their performance was better than the performance of their peers.

Reto R. Gallati

Chicago, June 2012

Figure 1: Investor Profile, Mirror, mirror on the wall, who is the prettiest investor of all? Illustration by Catherine Satrun. Copyright Reto R. Gallati 2012.

investment objective

The financial goal or goals of an investor. An investor may wish to maximize current income, maximize capital gains, or set a middle course of current income with some appreciation of capital. Defining investment objectives helps to determine the investments an individual should select.

[Source: Wall Street Words: An A to Z Guide to Investment Terms for Todays Investor by David L. Scott. Copyright 2003 by Houghton Mifflin Company. Published by Houghton Mifflin Company. All rights reserved.]

1. Sharpen Your Investor Profile

One of the first steps to become a successful investor is to write down your Investment Objectives and your Investor Profile . It begins with the development of an investment plan. The first step is the identification of personal goals and objectives, and having a time frame for goal achievement. The end result should be a near autopilot, long-term and increasing wealth. Asset allocation is used to structure the portfolio so that it operates in a goal-directed manner. The finished plan must be flexible in design (to adjust for economic, political, and personal reasons), be based upon reasonable expectations, be simple in structure and operation, and be easy to supervise.