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Robert Stephens, CFA
Robert Stephens, CFA
Articles (396) 

Warren Buffett on What Makes a Successful Value Investor

Adopting these traits may improve your portfolio management capabilities

September 23, 2020 | About:

Value investing strategies can become unpopular during bull markets. Rising valuations and optimistic forecasts can cause some investors to switch to growth strategies that place less emphasis on buying stocks at low prices.

However, in my view, value investing is a logical long-term approach to use when allocating your capital. It can help you to avoid excessive risks and generate high returns through buying quality companies when they trade at low prices.

Berkshire Hathaway (NYSE:BRK.A) (NYSE:BRK.B) chairman Warren Buffett (Trades, Portfolio)'s track record highlights the potential success of a value investing approach. His patient attitude and simple strategy could be key reasons for Berkshire's 20% compounded returns in the past 55 years.

Focusing on fundamentals

It is tempting to follow the lead of other investors in a bull market or in a bear market. For example, some investors may now find themselves becoming more optimistic about the prospects for stock prices after the market's 50% gain since March. Likewise, investors may become pessimistic about the S&P 500's prospects during a bear market because stock prices have experienced a decline.

However, avoiding bullish and bearish sentiment could be crucial for anyone seeking to become a successful value investor. Ignoring your emotions makes it easier to judge investment opportunities based on facts and figures, rather than the prevailing mood among your peers. This could improve the efficiency of your capital allocation and allow you to take a contrarian view when it is advantageous.

Buffett has sought to maintain an even temperament throughout his career. As he once said, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd."

Using a patient approach

Rising stock prices over recent months may mean there are fewer companies trading at a discount to their intrinsic values. It is tempting to buy stocks that are overvalued in this situation, rather than holding cash due to low interest rates. However, using a patient approach that waits for more attractive risk/reward opportunities to appear could be more effective.

In my opinion, the ability to turn down unattractive investment opportunities could be an important trait of successful value investors. A selective approach may mean that you sometimes miss out on stocks that go on to generate high returns. However, it will also help you to avoid unnecessary risks that may be present in the current bull market.

As Buffett once said, "The stock market is a no-called-strike game. You don't have to swing at everything - you can wait for your pitch."

Adopting a simple strategy

Value investing is a simple means of allocating capital. At its core, it is a long-term strategy that focuses on buying quality businesses when they trade at prices below their intrinsic values. They are then held until there are more attractive places that offer superior risk/reward opportunities available elsewhere.

Therefore, successful value investors do not need to use complicated formulas or complex methodologies when managing their portfolios. Complexity may be far less important than consistency and self-discipline when using the market's cycles to your advantage.

Despite being one of the wealthiest investors of all time, Buffett's approach to managing Berkshire's capital has always been very simple. As he once said, "You don't need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ."

Disclosure: The author has no position in any stocks mentioned.

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laramarry
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