Introducing 4D Investing from Baseline Investments

Baseline Investments' 4D Investing framework is a way of making investing decisions. It gives a good filter or lens through which to analyse investment decisions already made or to justify decisions about to be made.

It employs classic, long tested investment principles. The 4D refers to Diversification, Discipline, Diligence and Daring. The blog will explore the meaning of each of these D's and show ways in which the framework could be used to analyse investments.

                                         

The framework is depicted by the pyramid above. Diversification is considered the bedrock of any successful investment strategy. It can be summarized by the old adage, "do not put all your eggs in one basket." In investments, it means spreading you investments over a reasonable range of different options so that exposure to one particular type of investment is limited.

Discipline is required to inform choices, particular when the investment choices may not be behaving as expected as is sometimes the case. In managing any type of investment portfolio, it is necessary that a well thought out disciplined approach is considered ahead of choices and investment action, such as adding assets to or removing assets from an investment portfolio.

Diligence is about doing the appropriate amount of research to select the investments that should be included in the diversified portfolio. The necessary degree of research required should depend on the type of investment choice. To do this, a knowledge of investments is required, as well as historical data to have an insight to the historical behaviour of investments. Unfortunately, what is really necessary is the future behaviour of an investment. What-if analysis and scenario analysis can help to inform the future, having looked at the past.

Daring is an interesting one. The right degree is necessary. Daring is defined by the Oxford Advanced Learners dictionary as being brave, the willingness to do dangerous or unusual things, involving danger or taking risk or as the courage and the willingness to take risks. Any investor is taking a risk in the presence of investment uncertainty, and known when and how much risk to take is a critical ingredient for investment success. The degree of daring, or risk taking, needs to be adjusted to suit the investment environment. Here, diligence helps to quantify risk, discipline helps to inform decision making and diversification helps to manage daring.

Here is the summary of the 4D investment framework. The blog will expand on each dimension and give practical applications based on the current, historical and future investment environments.

Happy reading
Emmanuel Aluko, CFA.