5 Traits You Need to Be a Successful Value Investor

These qualities can make all the difference

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Mar 10, 2017
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Value investing is often touted as the best investment style to follow if you want to outperform over the long term. The world’s most renowned investors such as Warren Buffett (Trades, Portfolio), Carl Icahn (Trades, Portfolio) and others have accumulated massive fortunes by buying undervalued equities and riding them to profit.

Value investing is not as easy as buying the cheapest stocks on the market and waiting. Along with the financial expertise needed to pick the best value investments, you also need to have a firm conviction in your own picks. Here are the five key traits you need to be a successful value investor.

Patience

Without a doubt the most important trait required to be a successful value investor is patience. Patience is required on both sides of the value equation. You need to be patient both when you are looking for opportunities and when you are in a position.

Waiting on the sidelines and not entering the market until the time is right is probably the most important part of value investing. If you have a set intrinsic value in mind for a stock, there’s no point buying at a 5% or even 10% discount; you need to make sure an adequate margin of safety is built into the position. A discount of 30% or more may be required. Waiting for such a discount will take time especially during bull markets.

Experience

Most investors will feel the pull of the markets when they first start buying stocks, which is why you need to be an experienced investor to be a good value investor. Patience comes with experience and while you can get some idea of how to react in market environments by reading there’s no substitute for real life experience.

The best way to get this experience without risking everything is to start off small and try to learn as much about the market as possible before risking big bucks.

Contrarianism

Value investors have to be contrarian; it’s part of the business. This means that sometimes value investors will find themselves taking the opposite view to others, which may seem daunting at first. When markets are falling, taking the opposite side of the trade to everyone else can be both a physical and mental strain.

To make sure you don’t make silly mistakes by jumping in or out of a position at the wrong time, it’s best to close the doors, ignore the noise and concentrate on your own figures, not the beliefs of others.

Conviction

To complement both patience and contrarianism, a strong conviction is needed. The knowledge that you are right and your calculations of intrinsic value are fair and well reasoned will help you maintain a cool head during periods of market turbulence. That’s not to say that you should follow your initial investment thesis without question.

The best investors consistently revisit and update theses to ensure they remain relevant and recalculate any intrinsic values if there has been a sudden change in the company’s prospects. That brings me to my last point.

Be willing to take a loss

Not every investment you make will be successful. You will have to take losses throughout your investment career. Sometimes this will be because you made a mistake; other times your investment thesis could have been correct, but the company made a mistake that few could have foreseen. Other possibilities such as natural disasters or wars may cost you money, but that does not mean that the investment thesis was wrong in the first place.

Sometimes an investment doesn’t just not work out, and that’s okay, learn from what went wrong and move on. Take a loss, find a better opportunity and forget about it. The one thing you do not want to find yourself doing is holding onto a loser trying to avoid a loss. Doing so could end up with a catastrophic result that will leave you wishing you had just taken the loss in the first place.

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