The Disciplined Investor

Updates:

1. This commentary is provided for general informational purposes only and does not constitute financial, investment, tax, legal or accounting advice.

2. I wrote this letter to myself years ago. If I have time, I will update the letter as my investment strategy has evolved. I still believe in the fundamental principles and invest in ETFs, but I now hold around 15-20 stocks for 12-month periods based on growth, value, and income analysis. Most have a 25% trailing stop loss.

Dear Tyler,

I’m about to share the investment strategy that will make you a millionaire. It may seem tedious, but it will outperform the majority of financial professionals over time.

The key to your success will be discipline.

First, we need to get you in the right mindset. Let’s start with an old parable about a banker and a fisherman.

An investment banker was visiting a small coastal Mexican fishing village. The banker walked down the beach and started a conversation with a local fisherman who had just docked his small boat. The banker noticed several giant fin tuna and complimented the fisherman on his catch. Impressed by the quality of the fish, the banker asked the fisherman how long it took to catch them.

The fisherman replied, “Only a little while.”

The banker asked why he didn’t stay out longer and catch more fish.

The fisherman replied that he had enough to support his family’s immediate needs.

The banker then asked, “But what do you do with the rest of your time?”

The fisherman said, “I sleep late, fish a little, play with my children, take siesta with my wife, stroll into the village each evening where I sip wine and play guitar with my amigos. I have a full and busy life.”

The banker scoffed. “I am a Harvard MBA and could help you. You should spend more time fishing and, with the proceeds, buy a bigger boat, and with the proceeds from the bigger boat, you could buy several boats. Eventually, you would have a fleet of fishing boats. Instead of selling your catch to an intermediary, you would sell directly to the processor, eventually opening your cannery. You would control the product, processing, and distribution. You would need to leave this small coastal fishing village and move to Mexico City, then LA and eventually NYC, where you will run your expanding enterprise.”

The fisherman asked, “But señor, how long will this all take?”

To which the banker replied, “Fifteen to twenty years.”

“But what then?” asked the fisherman.

The banker smiled and said that’s the best part. “When the time is right, you would announce an IPO and sell your company stock to the public and become very rich; you would make millions.”

“Millions?” asked the fisherman. “Then what?”

The banker said, “Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take a siesta with your wife, stroll to the village in the evening, sip wine, and play guitar with your amigos!”

Your financial freedom is the goal, not a relentless pursuit of wealth accumulation.

From the Millionaire Next Door, “Wealth is more often the result of a lifestyle of hard work, perseverance, planning, and, most of all, self-discipline.”

If you spend everything you earn, you are not getting wealthier. This investment strategy only works if you follow two principles.

Give your investment portfolio plenty of time to benefit from compounding interest.
Minimize the costs you incur along the way.

Before we get to the nuts and bolts of the financial strategy, one last thing. There are many ways to accumulate wealth. Throughout your life, you will be tempted by alternative investment opportunities.

When evaluating those opportunities, ask yourself the following questions.

Does it meet your ethical standards?
Is it a bandwagon investment? Put another way, are people selling self-help books and online courses on how to get rich by making this investment?
Does the investment promise a very high rate of return within a short period of time?
Do you understand the investment? Can you quickly explain the investment in 2-minutes or less?

Only invest if you answered Yes, No, No, Yes.

Pursue investments that pass the test. There is no guarantee that alternative investment opportunities will present themselves, which is why this strategy focuses on investing in the stock market. It’s an investment tool with a proven track record available to you right now.

I’ve outlined an investment strategy that will require several hours of dedicated reading and administrative time upfront but only involves a couple of hours of your time per year. That’s less than 0.001% of your time per year; a small price to pay for financial freedom.

Let’s get started.

Read “If You Can: How Millennials Can Get Rich Slowly” by William Bernstein. It’s only 16 pages long and sets the foundation for what you need to know.
Read “Common Sense on Mutual Funds” by John Bogle. The premise of this investing strategy is buying indexed funds that allow you to diversify your portfolio and track the market as a whole.
Read “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy” by Stanley and Danko. This a reminder that the majority of real millionaires live below their means.
Read the Canadian Couch Potato’s getting started guide. Now that you have educated yourself, you don’t need to use your bank’s financial advisor. Financial advisors are often trained to push you into high-cost mutual funds.
Set up self-directed tax-free investment accounts (i.e., RRSP, TFSA, RESP) with an online brokerage like Questrade. Make sure you choose an online brokerage with low trading fees. Stay away from margin accounts.
The more you automate, the better. Set up an automatic deposit from your bank account into your investment account whenever you get a paycheck. Start small and increase the amount over time.

Note:
If you don’t work for yourself, choose to work for a company that offers an RRSP matching program. Some employers will match your group RRSP contribution up to a certain percentage of your paycheck—Max out this percentage. You can’t beat that return, and it’s a great way to save automatically.
Find a model portfolio to help you determine what ETFs to purchase. You are young, so it is common to start with a more aggressive strategy (i.e., 80% equity; 20% bonds). This mix will shift as you approach retirement and want to reduce risk and withdraw a fixed income.
Set up a spreadsheet to track your investments over the year. Use this spreadsheet to track personal finance KPIs like net worth, debt-to-equity ratio, and investment return.
After a couple of years, set aside a small portion of your portfolio to invest in individual stocks that excite you. Use your acquired expertise in your field to make intelligent investments. For example, if you work in the technology industry, invest in tech companies that you see as good future bets.
As your life situation gets more complicated and you earn more income, develop a strong relationship with an experienced tax accountant. A good accountant will pay for themselves several times over.
Once your investment portfolio grows large enough, new investing options will become available. It will be time to start considering an investment advisor and portfolio manager. You may want access to alternative investment vehicles.

A few last notes for you to consider:

Always pay off your high-interest debt first and use debt to your advantage. Building up your credit score allows you to access more high-quality debt (i.e., lines of credit, mortgages, and credit cards with better benefits).
Become debt-free, consistently save, if possible, find multiple income streams, and always have a 6-month emergency fund. Build a foundation, then start taking some shots.
Be disciplined. The market will fluctuate wildly over the next 20 years. You are playing the long game. Rebalance your portfolio once a year.

Benjamin Graham said, “The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.”

I’ve laid out the blueprint. It’s up to you to follow it. Always remember, the best investment you will ever make is in yourself. Prioritize time to read and learn. The results will follow.

Sincerely,
Future Tyler