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The Most Important Lessons

Lesson 1: Know thyself, value investor

April 07, 2017

During the past few years, I’ve learned an embarrassing number of lessons. While some of the lessons are painful, hopefully I’ve grown out of them stronger and better.

During the next couple of months, my plan is to jot down the most important lessons that I have learned. I hope this will not be a monologue – I welcome all the readers to share the lessons you have learned over the years either in the comments area or in your own articles. In doing so, I also hope not only will I be reminded of the lessons, but also we can grow together as value investors who continuously seek the truth in investing.

Today I’d like to start with probably the most important lesson – know thyself.

Know thyself. Sounds simple and easy yet in practice just the opposite. The question of “Who am I” has been asked and explored by the great Greek and Chinese philosophers for many thousands of years. Yet today, for most of us, even if we sit down and spend much time thinking about it, we might find ourselves perplexed.

When I first started investing, I was into all investing strategies and all types of companies. I tried technical analysis, momentum investing, growth investing, fancy options strategies, swing trading, fundamental analysis combined with technical analysis and etc. You name it. I’ve tried them all and I thought they were all going to work.

Then I found out about value investing and started following many guru value investors. One day I would look at the stocks David Einhorn (Trades, Portfolio) bought and the next day I would be interested in the stock Francis Chou (Trades, Portfolio) bought. A few days later I’d jump to the stock that Ron Baron just added. And maybe a week later I’d be buying the stock Prem Watsa (Trades, Portfolio) just bought.

A while later I found myself jumping around industries. I was looking at energy stocks, mining stocks, financial stocks, health care stocks and even the utility stocks. I was curious about every industry. So I kept reading and reading and reading, hoping I could master them all.

That wasn’t enough. To spice up the game a bit, I ventured into special situations, mostly spinoffs. I followed quite a few spinoffs and luckily made good money in a few. Then I thought maybe I should be looking into other special situations such as recapitalization and reorganizations.

The result of this “Curious George” was predictable – I made a few blunders, each for different reasons but each for the same reason – not knowing who I am.

Those mistakes led me to pause and reflect upon the question of who I am. Specifically I wondered whether I had the right temperament and what type of value investor I am. The summary lessons I came up with were:

  • It’s extremely important to know your own personality type and temperament, and the associated strengths and weaknesses.
  • The greatest investors know their sweet spots and they stay with those spots, which fit their personality type and can maximize their strength.
  • You can generally find out your style over time through the gurus you follow the most and the type of stocks that attract your attention.

In October 2014, I wrote an article to address the temperament question. In May 2015, I wrote an article to address the personal moat question. My thinking has evolved quite a bit since these two articles, and I’m sure it will continue to evolve. But if you ask me today what does it mean to know thyself as a value investor, I would say figure out the answers to the following list of questions:

  1. What is your personality type and what are the associated strengths and weaknesses of this personality type?
  2. What habits in life have you formed that are tied to your investment philosophy? Does it make sense if one arrives at the airport 30 minutes prior to departure and calls one a value investor who seeks margin of safety? Do you enjoy deferred gratification or delayed gratification? Do you get defensive when others provide disconfirming evidence? All the little things in life reveal a remarkable deal about who we are as value investors.
  3. How do you judge whether the decisions made by you or others are correct or not? Do you judge by outcome or by reason? (see my article "Outcome Versus Reasons")
  4. How do you define value? (see my article "What is Value")
  5. How do you define your circle of competency? How can you tell if a company is within your circle of competency? (see my article on this topic here)
  6. What is your ultimate goal as a value investor?
  7. How long is your investment horizon and where do you expect to get most of your expected total return? Fundamental growth, valuation change, or return of capital? (see my article "How Long is Long Term")
  8. Do you believe in the scuttlebutt approach or do you believe in the classic value approach? Are you more comfortable with a quantitative approach or a qualitative approach? What gurus do you admire and follow the most beside Warren Buffett and Charlie Munger and why?
  9. Which industries attract you the most and why?
  10. Are you comfortable with extreme concentration?

The list can go on for a while but I think if you can answer the above 10 questions, you should have a pretty good idea about who you are as a value investor.

My advice Start today and know yourself.

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About the author:

A global value investor constantly seeking to acquire worldly wisdom. My investment philosophy has been inspired by Warren Buffett, Charlie Munger, Howard Marks, Chuck Akre, Li Lu, Zhang Lei and Peter Lynch.

Rating: 5.0/5 (10 votes)



Fung9815 - 2 years ago    Report SPAM

Yet another great article! Thanks.

I think 'knowing thyself' is not only important for investment success, but also for personal growth in life/career.

I've spoken to many of my friends, most of whom are perfectly decent individuals, they got stuck in their career and/or life largely due to their ignorance about themselves. They just don't know what's their own passion and their hidden potential, and they drag themselves to their 9-5 jobs that they don't like. People like us who discovered our passion in investing (especially those who did in their young age) are very lucky, partially because this field can be quite financially profitable and it's fun. Which is why, other than sharing my knowledge on investing with others, I always like to help others in discovering their passion and their hidden potential.

Back to 'knowing thyself' in investing, I think it is very important to perform first-principle analysis on thyself, rather than relative analysis. Many people take Buffett's value-investing philosophy superficially without adjusting to their own temperament, financial needs/position, expertise in their own field, and most importantly, their own opportunity costs. Many value investors just gave up on finding cigar butts and turned to finding companies with great moat simply because Warren and Charlie do so, without considering how attractive the cigar-butt universe can be to the small investors. Elon Musk taught me well on reasoning from first principles, and it applies to almost everything in life, including investing.

On my own most important lesson in investing, I'd put 'opportunity costs' / 'saying "No" to 99% of the ideas' at the top of my list. It's hard to master, I can assure you. Try saying "No" to an idea that is trading at 30% discount to your intrinsic value and see, it is psychologically disturbing because you'd forego an attractive idea for a greater idea which may not come in the near future. Insisting for 50 cent on a dollar requires not only patience, but also a willingness of being 'unproductive' at most times. I believe strongly that anyone who can master this lesson will definitely do well in investing over the long run.

The Science of Hitting
The Science of Hitting - 2 years ago    Report SPAM

Great article Grahamites.

"What is your ultimate goal as a value investor?" It's a question so many leave unanswered.

It's important because of the follow-up questions: How do you plan on achieving your goal? What is the "cost" / downside of your method (no free lunch) relative to other approaches? This requires serious thought. As you note, you cannot honestly answer these questions unless you know thyself.

Moshe60 - 2 years ago    Report SPAM

Thank you for the information.

Thomas Macpherson
Thomas Macpherson premium member - 2 years ago

I know my limitations - slothful, indolent, and not so bright. So I leave everything else to my portfolio holdings' management teams.....

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