Do you have what it takes to be a successful value investor?
The truly great value investors are often copied, but their results are rarely duplicated. Do you have what it takes to be a successful value investor?
It’s a simple question, but Michael van Biema, the founder and chief investment officer of van Biema Value Partners, shows it’s not a simple answer. After studying the habits of some of the best and brightest value investors van Biema found a number of traits that were shared by some of the most notable value investors.
Analytical ability alone does not constitute a really good investor. A lot of people don’t have the patience or temperament to really be investors.
You can’t teach temperament. Conscientious employment and a very good mind will outperform a brilliant mind that doesn’t know it’s own limits. As Warren Buffett said, “The good news is that to be a great investor you don’t have to have a terrific IQ. If you’ve got 160 IQ, sell 30 points to somebody else because you won’t need it in investing. What you need is the right temperament. You need to be able to detach yourself from the views of others or the opinions of others.”
The average investor with the ability to perform the in-depth fundamental analysis is better off trimming the number of investments they hold and redistributing their capital into their top 10 or 15 ideas.
When times are good, portfolio concentration is popular because it magnifies gains; when times are bad, it’s often abandoned—after the fact—because it magnifies volatility.
Portfolio concentration can deliver superior long-term investment results versus diversification on long-term results.
The Holy Grail for any investor is a stock with a high probability of winning and also a large potential gain compared to the potential loss.
The Kelly Criterion (or formula) provides a mathematical framework for maximizing returns by calculating the position size for a given investment within a portfolio using probability (i.e. the chance of winning versus losing) and risk versus reward (i.e. the potential gain versus the potential loss) as variables. It helps answer key questions. How much money do we put in each stock? When do we buy or sell those stocks? In a nutshell, concentrated investing relies on taking large educated bets (using the Kelly Formula) and more concentrated portfolios.
These types of investors are willing to suffer through periods of temporary (but significant) loss of capital in an attempt to find opportunities where the probability of the permanent loss of capital is small.
Concentrated investors really do think like business owners. It’s often a convenience that the stock trades publicly. Several such investors came from families that owned or managed a business, so it was ingrained from a young age. Others figured it out spontaneously.
Even the world’s greatest business is not a good investment if the price is too high.
Oh yes, and don’t forget to think thoughtfully after reading all this wisdom. It takes time to really understand it and eventually apply it to some of your own investments.