Correlation of Patience with long term success

Hi,

We often see investors get into momentum play and make quick bucks. This is one style of investing. The other investment style focuses on being patient and wait for the price to go below intrinsic value. We often refer to it as value investing.

How relevant is value investing in India context. We have lot of Twitter accounts of investors and other investors calling themselves so called value investors but they give tips on stocks in fancy and consensus. Is value investing a contrarian approach or you may have consensus view if you see company is undervalued and can still build a position.

Often, investors come with varying temperaments just as their varying investing styles. How do you build a temperament which is patient enough and ready to have a non consensus view when the world is going for the next hot stock.

What are the activities we can do outside our investment sphere to develop patience and temperament to truly follow value investing? Is it a skill which can be developed or a personality you are born with? Can we have a correlation between temperament and investment success? I know Warren Buffet is a good example but there is only one Warren Buffet. Should we have different behavioural philosophy for different markets ? Does India fit the model for a value investing when we see valuations are peaking in absence of a secular earnings growth and most investors chasing the growth story not the value.

View invited.

Regards,
Amit

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Hi,

This is an interesting topic.

I have started my journey as “Value Investor” and bought shares trading below intrinsic value or close to intrinsic value, over past 5-6 years with good success. I will attribute this success to some process which I have followed and also to secular market uptrend during 2012-17. My earlier record is not that good.

My main learning from my success stories are:

  1. Invest with sufficient margin of safety. There is no alternative to it. (My recent buying in few growth stocks with no margin of safety has not resulted into good returns so far).
  2. Buy stocks at lower levels if it corrects rather than averaging up. This has given me very good returns once stock is overvalued (I typically sell if next 2-3 year price is factored into it).
  3. “Lack of Patience” in my case resulted into loss/not great profits. Generally when I switch to other stock from low performing stock, that new stock mostly goes down putting question mark on my switch decisions. This has happened quite a few times.Since stock does not move up or down in linear fashion, low performing stock suddenly start performing and it nullifies the earlier low performance, so patience is the key to success.
  4. Balancing portfolio with one stock or sector not overshooting preset threshold is important. Sudden down trend in particular sector often impact portfolio return. So holding not more than 25%-30% in one sector is important for me.
  5. Keeping CASH available for buying bargain stocks when market corrects is also important, to generate great returns. Mostly I am close to fully invested, so market corrections such as Aug 2013, Feb 2016 was not fully utilized by me and hence opportunity is lost to some extent.

I will add some more lessons from my investments if others find it useful later.

Disc: I hold mostly Diversified portfolio of 15-20 stocks, so my thesis may not be applicable to all.

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A cheetah will wait for hours in the grass lands waiting for a perfect opportunity to start her chase. Energy is spent is every chase, which means every failed chase will make the next chase more difficult. So a cheetah has to very careful about what type of animal she chases and when she starts the chase.

Similarly, a successful investor needs to wait for weeks and months waiting for a perfect opportunity to make an investment. Money is spent in every investments which reduces the cash that is available for the next investment choice. So a successful investor has to be very careful about that type of stock she chooses and when she decides to invest in it.

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Very much impressed with the views, I too follow similar approach of waiting for longer duration with a particular level (achieved after self serious research obviously with certain valuable inputs from various sources). In the process normally 3-4 good stocks from different sectors are identified, matching my investment style & risk appetite. Once stocks are identified and level of entry is finalized (considering past history of movements, support levels), the WAIT starts… in the process accumulation of funds for the targeted stock is also initiated (which includes selling certain stocks who are non-performing &/or expected levels achieved for cyclical)… Now the target in mind is to invest 25% fund in each 4 stocks, which were chosen after long research… As market don’t follow me (& I am not that much lucky every time)… 1 or 2 of the stocks never reach my planned level of entry… but I have been lucky to find atleast 2 or 3 stocks allowing me to enter at my RESEARCHED LEVELS… again the patient wait starts along with Best level to EXIT (I must admit that I have been very poor performer in choosing the great exit)… to name a few … I have seen Kajaria Ceramics shedding 40% from top, laopala shedding 32% from top, Sunil Hitech (not an investment stock) coming down 60% from peak… Just a note for all of them is that my entry levels were almost 50% of the lows they achieved after shedding whopping 32% - 60% from their peak. So my portfolio remained GREEN but ofcourse I saw the money spilling out … so patience does pay but over-patience (over confidence) teaches differently too…

Still I am learning the process to EXIT at BEST possible but the learning from market is that every day we learn something new from it.

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I think buffet sums it up in this quote " either buy a reasonable company at a fair price or a fair company at a reasonable price " . So the first step is identifying whether the company is mediocre or average than your entry should be at a bargain price and if the company is rock solid you can enter at a reasonable price. Quality will never be cheap. You can find such bargains during very the most pessimist times like 2008-10 . But in good times if you wait for a bargain / discount to intrinsic value you can be on sidelines and lose a good opportunity to mint money .

One need not wait for a 2008 type events to get quality for cheap. Sectoral headwinds and black swan events like demonetization will give one an opportunity to get quality companies for cheap.

Again, your definition of cheap might be different than mine. For me it is a quick 25% correction from its resent highs.

Even today one can look at the pharma, IT and 2 wheelers sectors to get quality companies for cheap. Just that, because of the sectoral head winds, companies in these sectors are not looking as “good quality as before”. That is because many people use the price as a (flawed) benchmark for quality!

As they say, good news or good price.

Thanks for your views. It is not about buy and exit timing strategy. It is about behavioral investing which is more art than science of investing.

What are the activities we can do outside our investment sphere to develop patience and temperament to truly follow value investing? Is it a skill which can be developed or a personality you are born with?

This is a question to people who do have an active mindset who have been investing for 5-10 years. How do they make a transition form active investing style to one which requires lot of patience and non-consensus (go against the crowd mindset)

How do they make this transition and what biases they overcome in this journey. As Charlie Munger said, The big money is not in the buying and selling … but in the waiting. Is waiting pays off in the 5-10 years or you need to jump to make use of tailwinds to get into next hot stock.

From my read in Australia, taking you outside Indian market context, people make most money out of momentum investing and not value or growth investing. Are we seeing similar shifts in Indian markets as well?

You see stocks going notches up when there is a brokerage report on the buy side and it remains elevated until some other brokerage cut their guidance.

Cheers,
Amit

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My kid has taught me patience.

My wife has taught me to under-react (or not react at all).

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