Over the years, value investor Howard Marks (Trades, Portfolio) has identified a number of attributes that successful investors possess. Fluency in the language of accounting and a strong understanding of where intrinsic value arises from are all very important. But there is another factor behind the success of most value investors - the ability to discipline your emotions.
It’s all about having the right temperament
Marks addressed the importance of emotional control in a talk at the Wharton School of Business in August. He began by describing the context in which stock market participants are getting more and more excited about stocks:
“When the economic news is good, everything on MSNBC is favorable, the newspapers only report the good news, most stories can be given a positive spin, the companies are performing stock prices are rising, the stock prices make people feel good, people feel optimistic, their fears are abating, their eagerness is rising - and they’re buying. ”
The simple truth is that people buy more when prices are rising, and sell more when prices are going down (and, conversely, prices go up when people are buying, and go down when people are selling - it’s a two-way street). Of course, every child can understand that you need to buy low and sell high, not the other way around. So why do so few people do this? Marks believes that it comes down to a lack of emotional stability on the part of investors.
“One of the things that they [successful investors] have in common is they’re not emotional. Not being very emotional is very useful in the investing world. There are worlds in which it’s not such a good thing - like in marriage - but the truth of the matter is matter is that it’s very helpful to be either unemotional, or to have the ability to control your emotions.”
Some individuals are naturally unemotional. Others have cultivated the ability to compartmentalise their emotions when it matters to their livelihood. There are many ways to do this, but the best way is to practice "helicopter thinking" - approach every difficult situation as someone viewing it from a detached position, and think about what advice you would give a stranger with the same problem.
Discipline and creativity
Emotional discipline is extremely important, as Marks has explained, but what I would add is that as well as being a calm person, the successful investor must also have a good imagination. There is a degree to which it is important to be imaginative and creative when you are surveying the investing landscape, for a number of reasons.
First and most obviously, it can help you identify businesses with strong moats. Second, having imagination is crucial to being contrarian. You can’t pull the trigger in the kind of distressed scenarios that Marks describes without being able to envision a world where asset prices recover. The best investors are able to combine emotional discipline with creativity, and to channel these attributes into a winning strategy.
Read more here:
- Jack Bogle: Don't Play a Loser's Game
- Paul Tudor Jones: These 3 Things Drive the Markets
- Why Buffett’s Berkshire Hathaway Bought Stocks in the 1970s
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