Musings On Value Investing: How To Succeed And Why Most Investors Won't

“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.” (Warren Buffett)

The process to value investing outlined by Graham and Dodd (GD) is simple and sound, but unfortunately not easy. Mainly because following it does not prevent from unforeseen adverse outcomes, especially in the form of short- term volatility.

Nevertheless, does it help to stack the odds of a satisfactory monetary outcome on the long- run for those investors with a reasonable analytic skill and, more importantly, the right mental framework.

 "Only when you combine sound intellect with emotional discipline do you get rational behavior." (Warren Buffett)

Valuation of individual stocks and putting them in relation to the prevailing market prices is the integral part of the GD framework to stock market investing. It intends to uncover the expectations that are priced into various asset classes or whole markets. It allows the value investor to generally differentiate between compensated and uncompensated risks.

But independently of being compensated or not for taking on a risky endeavour, such undertakings still entail risk in various forms. Many risks in investing exist. Most tricky are those ones where the investor is not even aware of that they are around.

Human beings have very limited knowledge and the future is highly unknowable and complex. If investors accept this fact they will become less confident about their action, start engaging in K- level thinking before placing bets and, most importantly, become more humble and less active.

 “Assiduity is the ability to sit on your ass and do nothing until a great opportunities presents itself” (Charlie Munger)

Value investors need to embrace the concept of being wrong in the short- term. They need to accept their performance to look dismal from time to time, because it is inevitable when you venture off the beaten track.

The movements on the equity markets are influenced by valuation, overall liquidity and the emotions of market participants. The last two factors are random and unpredictable variables that lead to high short- term volatility.

Most investors get frightened and distracted by the short-term fluctuations in stock prices and underperformance. It eventually leads the majority of so called value investors to abandon the investing strategy outlined by Graham and Dodd sooner or later, mostly at the worst possible time.

"While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster." (Benamin Graham)

But patience is paramount when following a value strategy. Value investors have to stick around those stocks long enough till fellow investors start to appreciate their findings too. Thus, doing nothing and being lonely is the name of the game. Maybe the two components hardest to follow, but indispensable for long- term success in value investing.

I have written extensively about the virtue of doing nothing, being lazy and procrastinating when it comes to stock market investing. So far I have written little about suffering loneliness. But just like being inactive, being lonely and ignored by fellow investors is hard to bear for an investor. Human beings are social animals and frightened of being lonely.

Furthermore, are there serious cultural misconceptions in the west about solitude. On the one hand it values autonomy, personal freedom and individualism, but is suspicious of anyone who goes away from the crowd and develops “eccentric” opinions and habits.

Believe me, being lonely in investing is one of the hardest aspects when it comes to contrarian value investing. Being solely concentrated in Japan with my investments I happened to become an expert in being lonely.

Japan is not really a stock market that is hated, but rather people are indifferent and ignorant about it. It is branded as the widow maker trade. With its numerous false dawns it disappointed stock market investors for decades now. They fail to realize that not the Japanese stock market disappointed them, but rather their expectations about the market let them down.

"First they ignore you, then laugh at you, then they fight you, then you win." (Mahatma Gandhi)

Be it as it may. It is a matter of fact that Gandhi’s quote about revolutionary ideas does apply also to stock market investing. But unfortunately only partially though. When you really dare venturing off the beaten track in stock market investing prepare to being thoroughly ignored and then you win. Forget about being laughed at and/ or fought over.

In order to succeed in value investing on the long- run it is indispensable for (prospective) value investor to self- contemplate. Looking inward in order to understand what kind of investor they really are. Being brutally honest about their social and behavioral tendencies in order to figure out if they are really cut out for value investing. Otherwise engaging in it will be a miserable experience.