Being a successful investor is not hard
but it is more difficult than it looks.
What makes it more difficult is not
acquiring the mental the skills you need, accounting and basic
mathematics can be learned by anyone.
What makes it difficult is the
emotional or behavioural skills you need. The difficulty in mastering
these skills is that the wrong approach is hard wired into our
brains, making it very difficult to take the correct action.
Here are my 6 indispensable traits
for investment success
1. The ability to seek and buy
undervalued securities
At first glance this seems easy but it
is not. Ignoring companies with upwards rocketing share prices while
looking companies those share prices are hitting new lows is not
easy.
An November 2009 example would have been ignoring companies like Amazon (PE = 71) and Apple (PE = 31) and
looking at telecommunications companies like Vivendi (PE = 8.8) and
other solid companies left behind in the current rally.
This trait will result in you not being
able to talk about your portfolio at cocktail parties because after
mentioning your investments you will either get a blank stare or
asked if you are mad and do not read the newspaper?
I am immediately self excluded from hot
stock conversations at cocktail parties.
It does not bother me in the least as I
invest to make money not to have something to talk about at social
gatherings.
2. The ability to stick to your
investment process
Even the most time tested investment
processes under performs in some years.
In fact studies have shown that they
can under-perform for up to three to four years.
It is the reason why Joel Greenblatt
says that, in spite of the spectacular success of his magic formula,
so many people will not start using the formula, thereby reducing its
effectiveness.
If you follow a time tested investment
process and it is under-performing, by all means re-evaluate the
reasons why it is under-performing, but be very careful before
changing it.
You may be changing at exactly the
wrong time.
Think of the value investors that
started investing in internet stocks just before the internet
technology bubble burst.
3. The willingness to learn from
past mistakes
This is also harder than it sounds.
Losing money on an investment is a
painful experience.
However working through your past
mistakes provides the perfect opportunity to see where you went wrong
and improve your investment process.
My best example is in 2007 my largest
position Lambert Howarth went into administration. It was not so much
the complete loss that hurt my performance it was the fact that I
allowed the position to become a too large a position in my
portfolio. Especially for such a small company.
I keep an investment diary where I
write a short note on the reasons for buying as selling an
investment and I have also started keeping track of
investment after I sold them, so that I can compare my sell
decision with the share price performance thereafter.
I review both on a half yearly basis.
4. Have the courage of your
conviction
Once you have gone through your company
valuation process and completed you analysis it is time to put your
money on the table and invest.
If the share price is moving against
the market hitting new lows it is of course a reason to be careful,
and a reason to make sure you have not overlooked something, but if
not it is time to invest.
Irrespective of what friends,
colleagues or other investors may thinking or doing.
Because of my fear that it will get
even worse, I missed the March 2009 lows and did not invest. That was
in spite of me watching companies I have already analysed fall to
ridiculously low prices. I am talking of price to earnings ratios of
less than four.
I watched the companies drop to price
earning ratios of four and even two and still did not buy. But I
learned from that experience, made changes to my investment process
and I think I will be able to buy when it happens next time.
Believe me it will.
5. Have a system for managing risk
Risk management is not rocket science.
But you have to think of what your
tolerance for risk is, write it down, and implement it as part of
your portfolio management.
Things you have to think about:
6. Have the courage to sell
This point may seem obvious but it is
not.
I have fallen in love with a good
performing company only to see the share price decline after reaching
a new high and a high valuation.
I am sure you know the feeling.
In order to avoid this happening I
re-evaluate the companies in my portfolio soon after the release of
interim or annual results to see if there are any fully or overvalued
positions that have to be sold.
I also have a system in place where I
review a position after an increase of 50% and 100%.
Usually however this problem takes care
of itself. I do not like having more than 30 companies in my
portfolio. Should I thus want to add a new position I have to decide
what position to sell before the new company can be added.
This process results in new undervalued
positions being added to my portfolio all the while at the same time
getting rid of over or fully valued positions.
Also remember, the lowest risk profits
in any investment is made when a company moves from being undervalued
to fairly valued, as this is the time when you have the largest
margin of safety.
