Value investing is a never-ending process where we get to understand more about ourselves and different angles to look at different companies. To get better is to reflect. One of my reader, Kelvin Soh, has specially prepared this write-up. With his permission, I decided to share with everyone so that we can benefit from his sharing.

What makes a great investor?

I started developing a strong interest in finance and investing about a year and a half back. Ever since then, I have been on a mission to ask myself, what makes a great investor?

I was introduced by my friends who have successful track records in investing to read this book by Pat Dorsey titled: “The Five Rules For Successful Stock Investing”. It is a book which I also recommend to friends who are keen to learn more about investing. I was introduced to different ratios like Return on Equity (ROE), Return on Assets (ROA), accessing management integrity and also learning more about various business models and industry.

My learning did not stop there. I continued reading more books from biographies of Warren Buffett written by Roger Lowenstein and Alice Schroder to Common Stocks and Uncommon Profits by Philip A. Fisher, One up on Wall Street by Peter Lynch and the list goes on. I read more than 10 books related to investment in 1 year.

However, after finished reading all these books, I asked myself, so now that I have read all these books does that make me a great investor? I knew the answer in my heart, the answer is NO. I continued to seek wisdom and knowledge from successful investors around me and also started investing my own money into the stock market to get a hands-on experience. Over the course of taking actions to learn to invest, here is my conclusion on what makes a great investor:

1) Undying Passion and an Unquenchable Thirst for Knowledge

There is a story I have to share to really explain what do I mean by undying passion and an unquenchable thirst for knowledge. This particular part of the story of a successful investor named Guatam Baid was what really impacted me:

During a stormy night in San Francisco in mid-2016, I was at home (I used to rent and live in a single room as a paying guest. I was trying to save every single dime that I could during this phase) reading the 2012 edition of Tap Dancing to Work, a compilation of articles on Warren Buffett published by Fortune between 1966 and 2012. Immediately after finishing the book, I came to know that there was a more recent 2013 edition of it which contained one additional chapter.

I did not want to spend money on buying the newer version of the book, so I went to the local bus stand, got badly drenched (even while using an umbrella) while waiting for over an hour in the midst of the storm, and travelled all the way to a distant Barnes and Noble bookstore to read the final chapter of the book inside the store and save a few dollars. (I had a monthly bus pass at the time, so the bus ride did not cost me anything.)

That night I realized that I had finally discovered my calling in life. It is difficult to express in words the sheer intensity of the emotions, thrill, joy and excitement that I experienced. I could not sleep that entire night. Only the fortunate few who discover their true passion in life will be able to relate to what I am trying to convey.

Read the full story here: https://stockandladder.com/investing-chat-with-gautam-baid/

How many of us are willing to brave the storm in the night and take a bus to read the final chapter of a book? I bet not many and that is why there aren’t many great investors around. Great investors like Warren Buffett and Charlie Munger are also practically learning machines. Buffett is turning 88 and Munger is 94 but they never stopped learning. Everyday Buffett still tap dances to the office and goes through pages and pages of annual reports.

Charlie Munger: “Spend each day trying to be a little wiser than you were when you woke up. Day by day, and at the end of the day-if you live long enough-like most people, you will get out of life what you deserve.”

Both Buffett and Munger still continue to inspire me at their old age and I am amazed by their wisdom and disciplined rational temperament which brings me to my next point.

2) Disciplined Rational Temperament

It is easier said than done. Market noises are very real noises which affect us emotionally which is usually what causes us to make irrational decisions. Even among successful investors, there are many differing opinions on when to buy or sell a stock. The key to long-term successful investing is best explained by Warren Buffett:

“Don’t watch the market closely. If they’re trying to buy and sell stocks, and worry when they go down a little bit … and think they should maybe sell them when they go up, they’re not going to have very good results.”

There are 3 parts to having a disciplined rational temperament.

[1] It is having the discipline of not investing in what you do not know well and avoid investing in the latest “money-making” opportunities. Base on my personal experience, the latest and hottest talk of the town is investing in Bitcoins and crypto-currencies. The price of Bitcoin rose to about U$20,000 and crashed well below $8000 in just a very short span of time. The bubble had burst and I have friends who both got hurt and made money in chasing bitcoin prices. I did not invest because I did not know it well enough (although I read the white paperback in 2012, and I shared it with my friend who purchased 3 Bitcoins at around U$800 and sold them at a price of $16,000) and it was clear to me that the prices which seem to be rising every minute during the bullish uptrend of the prices of Bitcoin were manipulated. More then 90% of the Bitcoins are only held by a few people and the price was bid up very quickly due to the sudden rise in buyers who got tempted by their greed as they see prices rising almost every other minute. When the few people decided it was time to offload their Bitcoins, the price inevitably came crashing down.

People actually asked me if I am feeling sour that I did not buy Bitcoins at $800 myself even after reading the white paper and my friend who had just simply heard me share about Bitcoin went on to buy and profited U$48,000 just a few years later. Honestly, if I tell you I didn’t feel a single bit of sourness I am lying to you. However, I knew I had to be disciplined and stick to the key fundamentals and concepts. Just like how Warren Buffett avoided internet stocks because he knew nothing much about them even though before the year 2000, it was as though those who had bought stocks with the word .com in their prospectus would surely make a profit but history have shown us otherwise. Not many people are able to have this discipline. I am writing all these down to remind myself to not be given in to speculations because the emotional Fear Of Missing Out (FOMO) can be very powerful.

[2] It is staying rational during both the up and down swings of your stock prices. I am sure many investors have heard of this quote by Ben Graham: “In the short run, the market is like a voting machine–tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine–assessing the substance of a company.”

I believe having the temperament to keep cool and not be too happy when stock prices run up and not be too sad when stock prices come down because if that was the case, then every investor would be a great investor. It actually requires years of practice to keep cool-headed when stock prices move in both directions. What actually matters most is the fundamentals of the business which we have bought. Is the business generating free cash for its owner? If it is generating more and free up cash for its owner over the years, in the long run, the stock price would definitely run up to match its intrinsic value.

However, over the years, there is bound to be some sort of fear or panic spreading every year. Recently, we have the fears of a trade war instigated by the Trump administration. We also have fears of the never seen before historically high debt levels due to low-interest rate environments which encourage borrowing. Every investor is bound to have heard the news of a potential crash in the stock market or have a friend whose so sure that the market is going to crash in the next 3 to 6 months and the smartest thing to do is to sit on 90% cash.

Every time someone presents a short thesis, they actually sound smart because they appear to be different from the crowd until time has proven that they got their short thesis wrong. I have absolutely convinced myself that no one is able to predict when the exact crash will happen. The best we can do is not predict but prepare for it. The noises and fear would not be able to scare a rational investor causing them to sell all their stocks. It is very easy to sell a stock away today, but if we are still able to stay rational and think long-term even among all the noises speculating that the worst crash in human history is coming, high-quality businesses lead by competent management is still going to be generating increasing free cash over the long run and its business intrinsic value is going to be much higher then today.

[3] A great investor is able to observe their own behaviour and develop self-awareness of their own temperament to be able to make the right disciplined and rational decisions in the most appropriate times. If an investor is unable to keep their emotions in check and develop self-awareness to make the right decisions at the right time, they end up giving in to the fear and panic and start selling away their high quality business which they spent a long time to discover even though the fundamentals and growth of the business is still intact. I have made the painful decision of selling stocks away to see it keep rising and also sold stocks away when the share price start dipping. In both cases, I acted out of fear and panic. I was not able to keep it cool and only focus on the fundamentals and growth were intact and ignore Mr. Market’s mood swings.

3) Ability to stay Focus and Patient

Focus and Patience are 2 words that seemed to be overused and overlooked by many people, but few can comprehend the power it can bring when you combine focus and patience together. After all, it is what helped Warren Buffett built his USD $450 billion empire.

There are a few schools even within value investing. I have friends who are successful in looking for miss-pricing opportunities such as cyclical companies, turnarounds, arbitrage opportunities and finding high-quality great businesses and attempt to buy that at a fair or better still, undervalued price and own them over the long run. I personally gravitate more towards the Buffett/Munger/Fisher style of finding companies which I deem have competitive advantages, lead by capable management with the large total addressable market.

Identify which style of investing suits you better, and be absolutely focused at it. In our fast-paced society, we have a lot of distractions especially with Facebook ads targeting you with get rich quick business opportunities or trading strategies. I haven’t found a way to get rich quick fast and sustainably over the long run but I am happy to have found a way to get accumulate wealth and let compounding do the job over time. With that being said, time is an important factor here.

“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.” – Warren Buffett

Buffett has been sharing and teaching his style of investing concepts through his annual letters to Berkshire Hathaway shareholders over 40 years. Despite that, the reason why most people don’t bother to learn to invest even though is because most people don’t have the focus and patience. Everybody wants Buffett’s wealth but few got his level of focus and patience. No matter how great a business and management is. They both need time to grow. This requires patience to wait for the business to develop. Most people just lose interest over time and sell the business away to invest in the “next big thing” which usually doesn’t end well.

The beauty of value investing is in the power of compounding. It starts off slow but once it reaches an inflection point, it is unstoppable. Just like a snowball rolling down a slope. It starts off small and gains in speed and size as it takes up more snow eventually turning into a large snowball. The theory sounds nice and gets people excited, but what is actually required is day to day absolute focus and the patience for compounding to truly work its magic.

Summary

What really separates a normal investor from a great investor, in my opinion, is not having a bigger and smarter brain or a better get rich quick method or any secret formula that is out there not yet revealed. It is the disciplined day to day focus, passion and rational behaviour that help make all the difference. Easy to explain but tough to master. Good luck and happy investing! If you gain something from this article, help us to share it with more people!

Thank you
Kelvin Soh