Good investing is a temperamental quality, not an intellectual. If you are a true value investor, you probably have better control of your emotions than Mr. Market. But at the end of the day, we’re only human, and it’s completely normal to occasionally go through some emotional discomfort in the process.
No One is a Sphinx
As long as you can remain unemotional in your investing decisions, you’ll do better than most. The truth is still that no one is 100% immune to some emotional aspects of it. We get excited just like Mr. Market does, but in a different way. “The Street” gets excited about the next hot thing. Value investors get excited from the incredible discounts the market sometimes gives us.
This inverted emotional aspect also applies to FOMO (Fear Of Missing Out). While the market gets FOMO from stocks that hit new highs, we value investors get FOMO on stocks with a low price, limited downside and big upside potential. If you work with smaller sums and have a concentrated portfolio, the universe of opportunities is larger, but your capital is low. The emotional frustration comes from seeing lots of potential companies, but a bony wallet prevents you from taking a meaningful swing. It takes patience to build up cash in order to deploy it in good ideas for compounding that will move the needle in a considerable way.
Post-Buy Doubt
Another less talked about emotional aspect of investing is the doubt you may experience after you buy into a position. Since we have concentrated portfolios and rarely swing, the (sparse) opportunities sometimes seem incredible. It’s very possible you will go through periods of excitement and doubt during your holding period. First you will be happy when you buy and got in on a seemingly good deal. The doubt may come in afterwards, when you start contemplating: “Is Mr. Market really giving me this opportunity?”, “Does the street know something I don’t?”, “What did I miss?”.
Legendary investor Mohnish Pabrai said wisely that you only truly get to know a company during the period you own it. There is a limit to your knowledge before you buy. As value investors we are comfortable with being uncomfortable. Since we ignore the street, we understand that the comfort of the crowd is a luxury we can’t afford. Our number one focus is to reduce the possibility of permanent loss of capital to an absolute minimum. This goal cannot be achieved by paying high prices. To reduce emotional decision making, I strongly recommend getting to know the ancient Stoics.
Conclusion: Revert Back to Your Original Thesis
Before buying a stock, you should write down your reasons why you’re investing. Your thesis. It seems to be the rule, rather than the exception, that prices go down after you buy, don’t you think? Remember, Mr. Market giving a lower quotation for your holding is not a call to action. If the facts haven’t changed, then the thesis has not changed. The facts that should concern you are the firm’s filings. These can be found in the “investor relations” page of the company.
Imagine the days when this information needed to be snail-mailed to you…
Investor extraordinaire, Joel Greenblatt, achieved his crazy 40%+ compounded returns through extreme concentration during Gotham Asset Management’s early days. This did come with the price of monstrous volatility. Most people cant handle the emotional roller coaster. And this is exactly what creates the opportunities.
If you can keep your head when all about you are losing theirs …
If you can wait and not be tired by waiting …
If you can think – and not make thoughts your aim …
If you can trust yourself when all men doubt you …
Yours is the Earth and everything that’s in it.
Buffettologists will know the poet.
-IGTSKasimir
Further Reading
Warren Buffett – The Partnership Days (1956 – 1969)
Philip A. Fisher – Lessons From The 15% Man
The Best of Ben Graham – Security Analysis
Phil Town – The Compounding River Guide
Margin of Safety – The Most Important Thing
Intelligent Investing = Thinking In Probabilities
Sir John Templeton – Wisdom From Global Value Investing Legend
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