Having a passion about investing that is in sync with your character. Being a good investor involves patience and discipline. If that’s not in your DNA, it’s better to hire a professional to manage your money. This is what celebrated investor Warren Buffett calls “tap dancing to work”—you should work in a field consistent with your temperament.
It’s important to become an expert outside of narrow ideas of investing. Good value investors use a multidisciplinary approach. They seek to understand the industries they buy into. Value investors spend 80% of their time reading, to understand the world, the market and businesses. (Check out MoneySense’s weekly column “Making sense of the markets”.)
This is not just about learning from investing mistakes, but from the flaws of the companies as well. It’s important to deal with companies that are transparent about their flaws so you can understand their business from the bottom up. (Bottom up means understanding the business, the management, sales, costs, etc., to value a company. A top-down approach is looking at the economy at large.) The best way to avoid mistakes is to understand businesses, review mistakes made and learn from them.
Have sound principles of operations for your approach to value investing that include: a process and a system that leads to success; a proper valuation model; reliable intuition that supports being an independent thinker; a long-term perspective based on research and homework; and, of course, a concentrated portfolio. Unless you invest a lot do not expect to make much.
Continue to develop and work on your character and temperament, and create strategies to train yourself to deal with any human nature weaknesses:
- Never make an impulsive decision—always look before you jump
- Think of the opposite scenarios
- Have an analytical process in place to understand when to buy and when to sell so that you overcome your emotions
- Create a checklist of the characteristics a company must have to make it an attractive investment, such as consistent dividend growth, low debt, etc.
- Get a mentor or a sounding board
If you do these things, you will not only do well as an investor, but also in life. Patience, discipline and a long-term perspective are traits that define your character. They lead not only to good results with investing but also to a balanced and long life.
As Greek philosopher Heraclitus said, “Character is destiny.”
George Athanassakos is a professor of finance at the Richard Ivey School of Business at Western University in London, Ont. He holds the Ben Graham Chair in Value Investing, and he is the director of the Ben Graham Centre for Value Investing. A detailed discussion of the valuation approach value investors follow can be found in his new book, Value Investing: From Theory to Practice (January 2022).