I am one of the many students of Warren Buffett and quite successful in applying his investment methodology and philosophy，although he never knows me. Mr. Buffett once mentioned that investment is not rocket science and you don’t need a very high IQ to do it. That said, with 18 years of experiences in practicing value investment, I think that it’s not a job an average person can do it, and takes certain level of high IQ, wisdom, and certain characteristics to do it constantly well in a life time.
As a Buffett style value investor, you must have the self-discipline to follow the rules set based on your understanding of Buffett’s methodology all the time. This is easier said than done. Fear and greedy often affect your decision making and taking action decisively. There were many times I missed the best prices to buy or to sell and then waited for the best prices to back again for fearing of losing money or just being greedy, and missed the whole opportunity forever.
Being Strong Minded
Fear and greedy also swings the market dramatically from time to time. When everyone runs to the exit, it’s very hard to hold back and not to follow the herd, so is the other way. While most of people in the market understand the saying “Be greedy when others are fearful; and be fearful when they are greedy” Only very few of them can actually do it most of time. Most of people are just not fit to stand against the popular opinion, and eagerly need the comfort of agreement from others, not to mention going the other way.
Self-discipline and strong minded are the foundation for a successful investor. To excel in investment, you need to have vision. However, your vision doesn’t need to be original.
Any successful entrepreneur has to have vision. A good investor must be able to see the vision of the entrepreneur of the company and therefore invest in the early stage of the company before everyone seeing the result of that vision. You don’t have to be a venture capitalist to invest in a start-up. While a company is growing, the vision is also evolving at different stage. When Facebook initially started in a university dormitory, Mr. Zuckerberg’s vision was connecting people. In 2021, his vision is metaverse and Facebook’s software will be everywhere in the metaverse. While this vision is an open-statement on the Internet, it’s up to you to interpret and act accordingly as an investor.
Enjoying Learning and being curious
It’s companies in blue sea making the most profits, not the ones in the red sea. To catch up with evolution of the business world, and disruptive business model or new technology in particular, you have to keep learning and enjoy it. The drive for such learning is the curiosity. Many people lose the curiosity as they grow up, especially when they feel comfortable with what they know well and are used to the old way. That is the cause of failure of Kodak, whose management failed to sense the coming threat of digital photography.
Many people stop learning or improving on what they are doing after gaining experience in their special area and especially having certain success. Such people are set to fail soon or later in a constantly changing world. The only thing is not changing is changing.
Even Warren Buffett has to change. He said he would not invest in technology companies many years ago, because he could not understand them. However, he invested in IBM and then Apple in recent years. Although the IBM investment was a failure, the investment in Apple has been a great success. This was not the first time he reflected on his way of investing and improved accordingly.
Self-reflecting is not only important for adapting to a changing world, also important for every aspect of one’s life, because no one can be right or can have the best practice at everything all the time. You need to do constant self-reflecting to avoid big or repeated mistakes and improve your way of thinking and doing things. An investor incapable of self-reflecting has the big potential to lose all the money and even to be heavily in debts.
Knowing one’s limit
Having mentioned about all those characters for a good investor, including enjoying learning, being strong minded and having vision, the most important characters for a investor is knowing one’s limit.
I studied chart theory in early stage, when I start to play in the stock market. There are so many interesting things to learn, such as “trend line”, “lines of supporting and resistance” 20-day, 50-day, and 200-day moving average, MACD or the average directional index (ADX). The list goes on. When you read all the chart analysis, the whole thing makes so much sense. As if you had mastered all these technics, you would make money at EVERY TURN of the market.
However, when I tried to predict the future movement of a particular stock using the chart theory, it doesn’t really work. In fact, the major factor for share price of a listed company to go up or go down is the financial result of the company, no matter what the chart showed before the announcement of the relevant financial report. I quickly abandoned the chart theory and am wondering why so many people still believe in it and talk seriously about it.
This is a typical case which people (chartists) believe that they know something, but they don’t. Or they really know something which I will never be able to understand. To me, only value investment make sense, not those charts. It is either the charts cannot really tell the future of price movement of a stock, or I am not able to master the art. Anyway, it doesn’t work for me.
Many people think they can time the market, which includes stock market, commodity market, currency exchange market, and so on. The prices in these markets not only affected by the supply and demand in the niche market, but also the economic and political events in general and even mother nature or a pandemic! If the centre planning of all the communist countries has been proved to be the source of disaster there, how can YOU predict the price movement of anything in short term?
I believe that companies in life science and medicine have great potential. But I cannot understand the science. The mere terminologies make me confused. I never tried to look into a company in the area.
Knowing one’s limit is the single most wisdom. Millions, if not billions, of life was suffered and even lost, just because someone having great power leaded the people in the country towards a dead end, thinking that he is leading his people to a paradise. Having this wisdom as an investor will at least keep you from losing your pants.
In short, a good investor must be not only open-minded, but also be able to holding back when things go beyond his limit. In addition, he must be not only strong minded, but also ready to change his(her) mind at any moment due to the result of constant learning and self-refection or any up-to-date information. These are the combination not many people can have.