The most important thing that counts when investing

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One story from World War II that I found as tragic as it was magnificent was that of Anne Frank.

Frank was born in Frankfurt, Germany, but in 1934, five years after she was born, she moved to the Netherlands for safety. When Germany took control of the Netherlands, the Frank family hid in their basement with four other Jews.

Anne then began writing a diary at the age of thirteen about her life, feelings and the outside world. She wrote in a diary every day for two years, until their hiding place was found and she was forced into a concentration camp, where she died of disease with her sister. She was only fifteen when she died.

Although Anne was not the only tragic girl in this war, her diary, which is available to read as Diary of a young girl shows the strength of her character. The diary portrays her as a brave and hopeful girl with character traits that are difficult to manage in the kind of hardship she was a part of.

One of her diary entries reads –

Human greatness does not lie in wealth or power, but in character and goodness.

Strong character is what Anne showed through this little life. And strong character is what makes people great in their lives.

In the larger scheme of this Universe, even if I look at an unimportant area like investing, I find that investors who have done wonders for themselves are those who have demonstrated strong character at various points in their investing lives.

By the way, I am not talking about those who have done well in recent years (thanks to the genius market environment) because they have not yet been tested for the strength of their characters, but those who have stood the test of time for more than a decade.

The thing about character is that no book or course will teach you this, although very few of them talk about how you can gradually build character. Ben Graham Smart investor is one of them. At Seth Klarman’s Margin of safety Is next. Philip Fisher Common stock Extraordinary profits is the third And then you have Howard Marks’ memos and Warren Buffett’s letters to shareholders. Most of the other things written about investing over the years, including this blog, are just commentary.

Anyway, if I were to take the lessons I’ve learned from these books and from watching successful investors build the strong character needed to invest well, here are five traits that stand out –

1. HUMILITY, especially intellectual.

Being humble in investing doesn’t mean doubting yourself or believing you’re untalented, unintelligent, or unworthy. On the contrary, it is about being humble about one’s intellect, questioning whether what we know is actually correct, and even adjusting our beliefs if we are presented with new information. In other words, it has a lot to do with intellectual humility.

As written by Philip Tetlock Super forecasttrue humility (in investing) is about recognizing that “…reality is profoundly complex, that seeing things clearly is a constant struggle if it can be done at all, and that human judgment must therefore be flawed.”

Very few investors have the courage to say, “I don’t know.” But that’s how you build humility in your investment process. If you start with the words “I don’t know”, you are unlikely to act boldly enough to get into trouble.

2. INTEGRITY, which is the quality of being honest and having firm principles.

Successful investors focus on their investment process with unwavering persistence and honesty, no matter what the stock market is doing or how others around them are behaving.

They show that to be a successful investor, you need to have a philosophy and a process that you stick to even when times are tough. This is very important. If you don’t have the courage of your convictions, patience and grit, you cannot be an investor because you will constantly be forced to fall in line with the consensus by buying at the top and selling at the bottom.

However, it is important to know that no one approach will allow you to benefit from all types of opportunities in all environments. You have to be willing to not participate in everything that goes up (like what is happening now) and only things that fit your process and investment approach.

3. DURABILITY, which is the determination to work hard and maintain faith in your investment process and the power of compounding.

Over the years, I have met many investors who knew about the power of compounding, but very few who truly understood its true power, because it doesn’t show up in one, three, or five years…but ten, fifteen, and twenty years . And in the age of instant gratification, because few have the tenacity to hold on to their belief in this power and high-quality company to create wealth, few investors end up successful.

American investor, hedge fund manager and philanthropist Leon Cooperman said:

It doesn’t matter if you are a lion or a gazelle; when the sun comes up, you better run.

What Cooperman seems to be talking about here is the importance of hard work, which is a direct offshoot of tenacity. Sensitive investing is hard work.

But then, Jesse Livermore, one of the greatest stock speculators of all time, is said to have said –

The main reason money is lost in stock speculation is not that Wall Street is dishonest, but that so many people insist that you can make money without working for it, and that the stock market is a place where this miracle can be performed.

Warren Buffett said –

I learned at a very early age the importance of working hard and being honest.

The hard work you put into identifying the businesses you want to own, and then the hard work you put into sitting still and doing nothing, is what should help you succeed in your investment endeavors. There are no shortcuts to the top.

4. SELF-CONFIDENCE, which is a conscious knowledge of one’s own character and abilities.

George Goodman aka Adam Smith wrote in his book Game for money

If you don’t know who you are, (the stock market) is an expensive place to find out.

Mere collection of facts and book knowledge can only lead us to chaos. This chaos causes most people to fail in their investing lives despite all the books they read and courses they take. While it is obviously necessary to read the wisdom and ideas contained in all those great investment books, they will only help us with the “techniques”.

But without self-understanding, these techniques would only lead us to frustration (perhaps “intelligent” frustration) and ultimately failure.

In studying successful investors over the years, I have come to realize that the right kind of investment education comes with a transformation of ourselves that depends entirely on our awareness of ourselves—our behavior, risk-taking abilities, and habits.

When we are self-aware, we are in a better position to behave well. And that can help save us from the self-destruction that most other investors lead them to.

5. ADAPTABILITY, which is the quality of being able to adapt to new, changing conditions.

This is the core of Charles Darwin’s theory of evolution –

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.

Adaptability is one of the few skills that is hard to learn but will pay off for the rest of your life.

Given the ever-changing world we inhabit, and the fact that this change is unlikely to ever slow down, what mattered a lot yesterday (eg skills, knowledge, etc.) may not be worth a penny tomorrow. Change used to be slow and gradual: now it is fast, radical and unpredictable.

Adaptability allows us to dwell in new circumstances and stay on top of the situation. Of course, this skill is best when combined with insight, which gives us a new perspective before the change itself. Growth depends on how adaptable you are.

Teacher. Sanjay Bakshi told me this in an interaction some time ago –

If you bought the right type of business, it will probably tend to deliver better results than you imagined. If you see this tendency play out after you’ve invested, don’t do it ruin by staying with the original model. Your model must be adaptive. If the performance is much better (or worse) than you expected, you need to change the model unless the improvement (or deterioration is likely to be temporary).

As Keynes said, when the facts change, I change my mind. You need to have the same mindset when it comes to investing both ways. This means that if the business is performing much worse than you previously predicted, and this performance is likely to continue because the moat is broken, then your original model needs to be reworked and it may turn out to be the case that you should sell the stock . You must have the ability to be detached from results based on unbiased analysis of real, meaningful data (not noise).

Combine adaptability with agility in these changing times and you have the right ingredients for success as an investor.

Oh, it takes time!
The thing about character is that it cannot be established quickly (not least by reading posts like this one) and in peace and quiet, but only over time and often through experience of trials and tribulations during a crisis.

In fact, the character often does not come out as a result crisis, goal in crisis – as in 2000, 2008 and 2020.

Character comes through even in heady times – like 1999 and 2007 and then now, when your humility, integrity and tenacity are being tested by the overdose of easy, fast money that you and the investors around you are making.

Charlie Chaplin said that a man’s true character is revealed when he is drunk. Well, my advice is to learn from watching others in the stock market who often get drunk on arrogance, fear, greed and envy. Then avoid being like them. Over time you will build a strong character.

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