Buffett's "genius was largely a genius of character—of patience, discipline, and rationality. His talent sprang from his unrivalled independence of mind and ability to focus on his work and shut out the world."
- Roger Lowenstein
Few prodigies in stock markets stay relaxed in their investment journey because they believe they have invested in fundamentally strong companies and discounted factors like volatility, inflation, behavioral tendencies, global politics, etc. These prodigies of investments shared their wisdom on attributes and through their books.
In this article, we will discuss one of such many interesting qualities.
Markets will be volatile, and it's the nature of the markets. But what matters is patience in waiting for the right opportunity.
According to Charlie Munger, "We cannot predict "when" the markets are becoming cheaper, but we can always wait for the markets to give us an opportunity."
In the situations like holding a lot of cash during bullish markets, it seems foolish not to invest. But this is the urge a value investor needs to control and wait for his bargains patiently.
Ok, so I have chosen a quality stock, waited for a fair and attractive price, and bought it, but the prices are still falling. Now, what to do?
there is an answer for this from Warren Buffet.
Stock markets are designed to transfer the money from "active to patient". The Markets transfer the gifts to you only when you are patient and rational by the way of compounding.
You feel confident about your investment by purchasing a quality stock at a fair price or an attractive valuation.
Now again, it's time to stay patient until the active investor's participation increases in the market; you will have to wait again for the best bargain to appear, but this time to book your profits in a disciplined way.
This process may take some months or years, but our focus should mainly be on being patient and getting rewarded by the markets.
We’ve got great flexibility and a certain discipline in terms of not doing some foolish thing just to be active—discipline in avoiding just doing any damn thing just because you can’t stand inactivity.
While we are trying to beat the benchmark returns very actively in the market, Charlie Munger says, stay disciplined. It is very difficult to avoid following the crowd, called herd mentality and for many people, it is very difficult to do nothing in the stock markets.
But remember, there is a price for being hyper-active in the markets in the form of taxes, brokerage costs, and other expenses.
Being a value investor needs a disciplined approach to averaging the stock when the valuations are going down and a disciplined approach to booking profits when the valuations are high.
Only a strong sense of value will give you the discipline needed to take profits on a highly appreciated asset that everyone thinks will rise nonstop, or the guts to hold and average down in a crisis even as prices go lower every day. Of course, for your efforts in these regards to be profitable, your estimate of value has to be on target.
Again, to stay disciplined, we need to have a strong sense of the value of the investment and the price we are paying. Once we arrive at a fair value of a fundamentally sound asset, aiming to stay disciplined and do nothing until the opportunity knocks on the door, not only keeps us out of unexpected risks from the markets but also brings the confidence that we are going to get a reasonable return.
You will get a few opportunities to profit from finding under-pricing. There are actually people out there who don’t price everything as high as the market will easily stand. And once you figure that out, it’s like finding money in the street—if you have the courage of your convictions.
Apart from being patient and disciplined, acting quickly, and being courageous in your conviction is the essential part of beating the returns of the street. This is contrary to what the crowd does when panic arises in the markets; stocks tend to fall. Being a contrarian with a strong sense of the value of a company/stock, it’s the time to believe in your conviction and grab the opportunity courageously.
Always remember the best times and worst times.
“The best time for a value investor is the worst time for others. The worst time for a value investor is the best time for others”. A value investor needs to sit on cash to achieve this effectively, waiting for an opportunity.
For example, during the first quarter of 2009, after the financial crisis. When the crowd is in a panic about purchasing stocks, Charlie Munger just pumped in the excess cash available into Bank stocks.
He had been waiting for an opportunity like this; when he saw what he wanted on the blinking screen, he acted courageously and decisively and purchased the stocks at discount prices, and this result is known.
The above example shows how a value investor should act in the best times*, and the advantages of holding cash during the crisis by doing nothing in the worst times**.
(“The best time* for a value investor is the worst time for others. The worst time** for a value investor is the best time for others”.)
What if you are not courageous under pressure?
According to Charlie Munger, if you do not want to be courageous or do not believe you can be courageous under pressure, you should buy a portfolio of low-fee index funds and exchange-traded funds.
Almost all good businesses engage in “pain today, gain tomorrow” activities.
— CHARLIE MUNGER
The current generation finds it hard to deal with deferred gratification, everything has to happen instantly, including profits from the investments. How an investor can reap the benefits of the compounding within a short period? Don’t expect a holy grail, it is simply not possible.
“Time in the market beats timing the market”.
When we are not giving enough time to a tree and expect fruits from it instantly. It’s just not going to happen. In the same way investments too, wait for the results of the company you have invested in and check the improvement, know the working of the companies you invested in, understand the opportunities that the market gives, and allow the power of compounding to take charge on the investments.
When you are just starting over investing, it might be hard to think long-term, for this reason, Charlie Munger once said, “accumulating the first $1,00,000/- is difficult”.
In the Indian context, we can say earning the first Rs, 100,00,000/- is difficult.
Once the power of compounding takes its charge on your investments, you just need to know, how much you had to invest to make your first Rs. 1 core.
Understanding both the power of compound interest and the difficulty of getting, it is the heart and soul of understanding a lot of things.
As said by “Tren Griffin”, even non-financial products also compound over a period, like habits. Thus, a value investor must cultivate the habit of differed gratification i.e., thinking for longer periods in their investment journey.
Learning from other people’s mistakes is much more pleasant.
— CHARLIE MUNGER
Do you feel someone is an ideal investor? Of course, yes, someone must be there, just start with understanding their view on investments, and start exploring how they have made profits. Ultimately you will reach some big names. Start reading their books.
The best part about a few legends in the investment world is that they not only write about profitable ways of investing, but they also write about mistakes they or their peers did.
Read about the different sectors, and different investment opportunities, different companies, speak to a company’s customers and suppliers, listen to the quarterly conference calls conducted by the companies, and stay updated on the companies or sectors you are interested in and also about the markets and economy.
In my whole life, I have known no wise people (over a broad subject matter area) who didn’t read all the time—none, zero. You’d be amazed at how much Warren reads, at how much I read.
However, we must understand that being studious and ignorant removal is a continuous process. The more we do, the more the knowledge compounds.
Even Einstein didn’t work in isolation. But he never went to large conferences. Any human being needs conversational colleagues.
— CHARLIE MUNGER
Consider a programming language, before it is run, it is compiled, so that the errors pop up. Colleagues are like compilers, they can help in compiling our decisions or strategies, here Munger doesn’t mean about large teams, but at least some people with the expertise in business, stock picking, estimating management’s abilities, analyzing financial statements, etc. The more we discuss the strategies the more the clarity in organizing our thoughts.
Warren and I aren’t prodigies. We can’t play chess blindfolded or be concert pianists. But the results are prodigious because we have a temperamental advantage that more than compensates for a lack of IQ points.
For a value investor, how he responds to emotionally to the ups and downs of life is more important than intelligence, which is called temperament. Estimating our temperament depends on understanding our natural abilities and coaching ourselves on improving our abilities.
It’s obvious that we are going to do our mistakes due to our emotions in the market, but training ourselves to control these emotions from the mistakes of the other investors will help in dealing with our emotions in volatile markets and leads us to develop a sound temperament.
“Unsuccessful investors are dominated by emotion. Rather than responding coolly and rationally to market fluctuations, they respond emotionally with greed and fear.”
Everyone makes mistakes based on emotions and psychological errors, especially in the stock markets, but the problem arises only when the investors are dominated by emotions due to market fluctuations. So, stick to your conviction. Develop a strong temperament that volatility or fluctuations in the markets can only make you cool and rational but not allow your mind to get trapped in the web of greed and fear.
At ATS, we believe a client should be well informed and educated 360 degrees on the aspects of investments. To receive our Newsletters regularly, register with your mail Id
This report is only for the information of our customers. Recommendations, opinions, or suggestions are given with the understanding that readers acting on this information assume all risks involved. The information provided herein is not to be construed as an offer to buy or sell securities of any kind. ATS and/or its group companies do not as assume any responsibility or liability resulting from the use of such information.