christoph-wolf

BY CHRISTOPH WOLF

22 DEC 2015

 

In his famous book, The Intelligent Investor, Benjamin Graham writes that “the investor’s chief problem – and even his worst enemy – is likely to be himself”. I could not agree more. While every investor at first needs to acquire a certain investor toolkit – how to investigate companies, how to value securities, etc. – also a number of character traits are needed to succeed. (How to obtain this investor toolkit is described in the video section of this webpage or also in Anaximander’s previous blog entry “The Investing Checklist”). 

So let’s look at a number of character traits, that all successful value investors seem to share. This is not only done because of theoretical scientific interest – Instead this investigation attempts to shine at least partial light on the following questions: Can a person learn these traits or are they born with them? And does this list give us a hint, why just so very few successful value investors exist today? 

Here is a list of characteristics I consider decisive for success and which can be found in a large number of successful value investors: 

1) Control of your ego
Imagine that you have been investing quite successfully for a number of years already. Everything you touch turns into gold! So naturally you start considering yourself as a highly talented value investor. You are great! You understood it! A stock will rise simply because it feels honored that you have bought it! This might be the natural response for most of us, but it is problematic: You will become deaf to other people’s arguments and you will stop questioning your beliefs. In value investing this leads straight to disaster.
When we look at a number of value investors, they mostly seem to have a rather small ego. Warren Buffett feels like an ordinary guy you could have a beer with. Ray Dalio says that “If you want to be powerful, you have to have humility”. And Seth Klarman – the Warren Buffett of the next generation- in 2013 returned $4 billion back to his investors, saying that he currently had no clue what to do with this money. The impact that you get with humility and control of your ego is the understanding that there is always more to learn and understand. Individuals with small egos are typically the same people that are learning machines and constantly trying to mature their understanding of their environment – regardless of the preexisting level of competence.

2) Possessing an information filter
There is so much information out there: Annual and quarterly reports, proxy statements, fundamental analysis, technical analysis, opinions of analysts and your friends… But most of it is just noise and distracts us from the real important information. So a good value investor needs a “spam” filter that allows him to concentrate only on the relevant facts. Some parts can surely be learned (The 4 Buffett rules qualify as such a filter), but my guess is that this ability is also partly inborn. If someone believes in technical analysis or analysts’ opinions, it will be very hard to change his mind.
What is crucial here, is to always ask yourself “Does it make sense to me”? “Why should this be the case?” Never believe, always check. Warren Buffett has this ability naturally: “I don’t read any analyst reports. If I read one, it’s because the funny pages weren’t available”.

3) Patience
This is the one where I personally struggle the most. It is just counterintuitive. In everything in life you need to do more – not less – to be successful. Sports, school, raising your kids – you name it. Only in value investing we should restrict our actions to a minimum. Wait for years. Buy when it’s cheap. Wait again. Be rich 20 years later. (Charlie Munger once called this approach “Sit on your ass investing”). It works, but it is surely exhausting. And my guess is that most people don’t have the personality for it. We can find this virtue in almost all value investors: Buffett/Munger (“hold for the long term”), Ray Dalio (“All of humanity’s problems always stem from man’s inability to sit quietly in a room alone”), Seth Klarman (“Consistency and patience are crucial.”). And Walter Schloss (“Have patience. Stocks don’t go up immediately”) used discipline and consistency to greatly outperform the S&P 500 over a 47 year time span.
To be clear, there is always a ton you can do: Read books and company reports, talk to other people, investigate companies. But this is all just preparation for the real actions: Buy and sell securities. And these should be kept at a minimum.

4) Conviction and thinking for yourself
Imagine you have bought a security and it drops. Most people panic, but successful value investors stay calm and buy on the dip. How can they be so sure that this is the right call? Well, in a downturn one can see, who has done his/her homework and who hasn’t. If you know that your security is worth at least as much as you paid for it, you can sleep well at night. But if you have bought something, it drops – and only then you start asking “What did I buy here in the first place?” then it is quite rational to panic. So it is important to do all necessary background checks before buying a security. It goes without saying that all successful value investors do this extensively. But while carrying out sufficient research can be achieved by everyone of average intelligence, there is a second requirement that cannot be so easily learned: remaining steadfast in your beliefs, no matter how hard the world seems to come crashing down. Ask yourself: How will I feel and what will I do, if my security has dropped by half? Because sooner or later this will happen. Only if you can shrug this off – or even get excited about the prospect of such great bargain prices – you will act successfully and survive during the next crash.

So what rare creature emerges from these points? A person that is hard-working, patient, possesses a great deal of humility and knows his own limitations. He is always thinking for himself and has strong beliefs (never follow the herd!), while at the same time also constantly challenging his own theories and trying to learn from other people’s wisdom and experience (don’t be stubborn!). An extremely special person that does not consider himself special at all. Seth Klarman, said that there is a value investing gene; you either have it or you don’t.

 

How many people do you know in your daily life with these traits? Not so many, I would think. And we should all honestly ask ourselves, how much of these characteristics can be found within us. While it might be frustrating to acknowledge that you do not belong to this special group, it is much better to know this limitation (and stick to being a defensive value investor, ie. buy and hold low cost index funds) than trying to actively beat the market and fail catastrophically.

 

On being asked, why he is has been so successful for over 50 years, Warren Buffett replied “I am rational”. It’s really that simple – but it surely is not easy.

 

Thanks for reading!

 

 

-Christoph

 

P.s. I want to hear why my analysis is wrong. If you’ve got some comments or questions about this post, be sure to leave it here on our forum.

 


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