Thursday, 2 February 2012
Character Traits Of Value Investors
In his 2002 book The Valuegrowth Investor, Glen Arnold describes the character traits and personal qualities of a ’valuegrowth’ investor as follows: (Note: Arnold describes the ’Valuegrowth’ investor as a distillation of the principles used by Ben Graham, Warren Buffett, Charlie Munger, John Neff, Philip Fisher, and Peter Lynch... a fine crowd indeed!)
To be successful investors we need to develop the ability to keep emotions from corroding the advantages brought by the Valuegrowth framework. The following qualities are needed:
Independence of mind: The market is full of beguiling rationales for the current consensus view. The Wall Street crowd has a tendency to follow a few lead steers like manic-depressive lemmings. Don’t accept Mr Market’s judgment of value. Think independently. Gather facts, apply tests and standards, and critically evaluate the business using sound principles.
If you do all these things you will have confidence and courage that comes from knowledge, experience and sober reflection. It does not matter that the popular view is different to yours. Be prepared to cut yourself off from the crowd and zig when the rest of the market is zagging. Be prepared to think and to act unconventionally--to go with your own reasoning. Be somewhere that allows you to ponder the really important issues--get away from the day-to-day stock market stimuli. Don’t be intimidated by the ’professional investor’. Remember: the vast majority of ’professionals’ fail to outperform their indices. The Valuegrowth investor is far superior to most Wall Street analysts.
Capacity for hard work: Valuegrowth investing requires full commitment. A good knowledge of strategic analysis, accounting, finance and economics are required. A willingness to spend time in scuttlebutt is necessary. The rewards of the Valuegrowth method are huge, but it asks for constant toil.
The ability to make decisions with incomplete information: In investment we are making judgments about the future. Owner earnings that are yet to occur cannot be stated with any great precision and yet we must still form a view. If you are uncomfortable with analysis based on shaky numbers and ball park figures; if you require facts that are provable before you can make a decision then you will not make a good Valuegrowth investor. Investment is a probability-based art form. The successful investors tilt the odds in their favor.
Resistance against the temptation to speculate: Discipline is needed to stick to sound investing criteria. This is especially the case in bull markets when you see speculators making vast returns. Don’t be tempted to play catch-up hoping to get your money out before the crash and return to thorough-investigation-with-a-margin-of-safety-investing later. You are more likely to go down with the rest, as Fisher and Graham discovered in 1929. You must resist emotions and gut feelings. Like the dog in Aesop’s Fable stick with what you know to be good rather than lose it trying to grab for deceptively better offerings. Buffett is content to aim for 15% annual appreciation. Why should we think we can safely aim for more than that.
Patience, perseverance, fortitude and consistency: Valuegrowth investors are not impatient to buy stocks. Stand on the plate and let the bad pitches pass by. Do not drop your standards. Patience, perseverance and fortitude are also needed when the stock price falls after purchase. Doubts about the wisdom of the investment start to appear. If you have done your homework and you are convinced that the stock represents good value then a falling price creates buying opportunities if you hold your nerve. Market pessimism is the friend of the investor, but it takes a strong will to stand against the tide of opinion.
Don’t be impatient to sell-- hold on to good stocks. It sometimes seems ages before the market recognizes the intrinsic value of a stock. If you hold on you can benefit from both rising earnings and an increase in the price-earnings ratio. On other occasions the price can rapidly appreciate and you are showing a good rate of return. The temptation is then to cash in your chips. This often needs to be resisted too. The best part of the return may yet be to come.
The Valuegrowth investor is consistent in his or her investment activity. Do not switch investment styles. Have a regular routine of investment following best practice. Even following Valuegrowth investment principles there will be down years. In these periods resist the temptation to give up and try the latest fashion. Also, consistency is needed in continuing to follow the story of the company. On a regular basis investigate if the story is still strong enough for you to hold.
Willingness to admit and learn from mistakes: Mistakes are bound to occur in investment. It is impossible to be right about companies all the time. In fact, excellent performance only requires us to be right six times out of ten. When a mistake does occur don’t sweep it under the carpet because you can’t bear to look at it and be reminded of your ’failure’. Face up to it, examine it and learn from it. In this way the quality of your investment decisions will improve. Also, learn from the mistakes of others-- ’you can’t live long enough to make them all yourself’ (Martin Vanbee).