Rounders

Investors are told to be disciplined. Central banks have spent six years punishing discipline and rewarding recklessness. The result is a market where the best investors sit in agony, knowing they shouldn't play, yet unable to stop themselves from playing anyway. What happens to investment discipline when the entire system is designed to destroy it?

• The discipline that separates good investors from great ones isn't research or conviction. It's the ability to fold hand after hand, to pass on stock after stock, to sit still while others around you are winning. Yet after years of being forced to sit out, talented people start convincing themselves that ordinary opportunities are actually exceptional.

• Every pressure point pushes in the same direction. The business model of financial media depends on flow. Asset managers fear losing capital if they sit out. Central banks have explicitly designed policy to punish restraint. There's almost no institutional resistance to playing the next hand.

• Even the greatest investors surrender to boredom. Stanley Druckenmiller sold all his tech stocks in January 2000 at 104 times earnings, calling it insane. Three months later, watching smaller accounts make 3 percent a day while his fund returned 7 percent, he bought $6 billion worth of the same stocks. He lost $3 billion in six weeks.

• The system has shifted from testing investment skill to testing allocation luck. In a market where central banks flood the system with credit, any garbage company performs as well as a quality company. The confounding influence of policy has made traditional investment discipline irrelevant or even a drag on returns.

• The real question isn't what happens on the way up when discipline breaks down, but what happens on the way down when the narratives that replaced discipline start to crack. The same stories that forced investors to abandon restraint will attack much more ferociously in reverse.