It's a no secret formula that great investors have. Investors such Warren Buffett and Charlie Munger rarely calculate net present value of future cash flow and they don't follow a grand finance theory that only they understand.
The opposite is true. Great investors read about the operating performance of publicly traded firms from resources that are available to us all. Their business understanding is within everyone's reach.
The qualities that make a great investors are the topic of this meditation. As finance theory and finance engineering evolve and as more convoluted ways to determine value are taught in academia, the more I look for simple, common-sense tools that Benjamin Franklin could have easily understood and are likely to be used a century from today.
Serious investors are avid readers, because reading provides perspective. Understanding the past, reflecting on the present and thinking of the future are crucial. This is because they allow to stay calm when market are shaky. Consider the passionate Bitcoin traders of our days. They buy the currency so that they can sell it at a higher price. For them, reading Charles Mackay's Extraordinary Popular Delusion and The Madness of Crowds would serve well. The kindle version only costs $0.56 as a side note.
For entrepreneurs who subscribe to Fortune or Forbes Magazine, that dream of amassing wealth in Silicon Valley, reading The Age of Gold: The California Gold Rush and the New American Dream link will force them to ask better questions about life. For example, are there truly shortcuts to building wealth?
One of Buffett's most known principles is that he will not purchase the stock of a business that he does not understand. Readers of the The Education of Value Investor know that one of Guy Spier's principles is to never buy a stock on margin. And if you visit the Magical Formula website, you will see that Joel Greenblatt looks for companies with high earnings on tangible equity.
What one investor may look for in a stock is not what other investor will. But it is clear that each great investors have a keen understanding of who they are. This is what drives their stock investing decisions, not the market. In the words of the Third Avenue's legendary founder, Marty Whitman:
"Short-run market considerations, the life blood of the Efficient Market Theory, are unimportant in value investing. It is not that the value analyst has access to superior information vis-a-vis the OPMI market but rather that the value analyst uses the available information in a superior manner."
The more you know yourself, the more your stock purchases will be independent of market sentiment. When I buy a stock, I imagine the purchase to be as similar as if I had bought a house in a community that I know well and who’s members I cherish; where I know that the property is adjacent to great schools and offers a convenient commute to work. In such a scenario, it is unlikely that I will sell the home – even if the real estate market drops by a third in value.
Observe the great investors and you will see that all have enough money. They don't have to work. Yet they choose to wake up each morning, commute to their offices, read financial reports in the morning and make capital allocation decisions by the afternoon.
The great investors buy stocks for other reasons than profit. In my opinion, either (1) they have something to prove, (2) they regard stock investing as joyful activity, (3) they are interested in understanding how businesses work (Buffet called once himself a "business hobbyist") or (4) they look at stock investing as an extension of their personality.
You will do poorly if you place your wealth with a money manager who never admits to mistakes. Great investors always describe, both verbally and in written format, their investing errors.
In The Education of Value Investor mentioned above, Spier describes why he bought the stock of Tupperware and analyzes what went wrong. Mohnish Pabrai disclosed to investors, in plain English, that he made a mistake when he had bought the stock of Horsehead. More recently, Buffett said that he had overpaid for Heintz Kraft. In short, honesty matters.
What all great investors share is contentment in life. They don't seek more capital to manage or to change their personalities. They stick to their investing philosophy even if there are trendier investment areas. Great investors follow the maxim: "Be yourself," which I believe results in an almost mystical aura surrounding them. This quality, which cannot be achieved by having an ample number of followers on Instagram, makes you want to be around them and hear what they have to say.
On the surface, their life contentment seems accidental; almost as if these great investors stumbled upon the life that is most suited for them. I find that hard to believe. The great investors are in a constant self-improvement mode, hacking for better habits and challenging themselves to become better decision makers.
While it is hard to define what makes and what will make someone content, it is obvious to see when one is not content. Think about that the next time you talk to your an investment manager.