The individual investor
More than calculating the movement of stars
The Right Stuff was the title of a 1983 movie which chronicles the first 15 years of the U.S. space program beginning with the extraordinary exploits of fighter pilot Chuck Yeager, who clearly had the right stuff.
I have given a lot of thought to the kinds of personal traits or personal qualities that lead to successful investing – the right stuff.
One irony is that geniuses don’t necessarily do well in the stock market. This would include mathematical geniuses.
Firmness of character
Isaac Newton is a good case in point. After losing his shirt in the South Sea Bubble, he reportedly said “I can calculate the movement of stars, but not the madness of men.” (Wikipedia). Lord Radnor is said to be the source of this quote. We learn from Newton’s niece that he lost some twenty thousand pounds, the equivalent today of millions of pounds. Newton was no fool when it came to money. For many years he ran the British mint.
Nobel Prize winners and other highly regarded academics in economics and finance frequently show no special aptitude.
As well, and of more than passing interest to us mere mortals, you don’t have to have a soaring I.Q. to do well.
At the end of his career in 1974 in the midst of what may still be the greatest bear market since the 1930s, Benjamin Graham gave a speech to securities analysts. It was styled “Renaissance of Value”, and was reprinted in Barron’s September 23, 1974, and is quoted by Roger Lowenstein. (Lowenstein, Buffett, The Making of an American Capitalist. 1995,2008) p160
Graham remarked that investing did not require genius: “What it needs is, first, reasonably good intelligence; second, sound principles of operation; third, and most important, firmness of character.”
Four personal qualities
In this post I propose to discuss several personal qualities that contribute to successful investing. There are other personal qualities I have covered in other posts. The four I look at today are: Natural curiosity; Creative thinking; A skeptical mind; and Counterintuitive thinking.
Natural curiosity
Marty Flanagan, who for many years led Invesco Ltd., one of the world’s leading investment management companies, entrusted with managing $1.2 trillion in assets, speaking about John Templeton’s personality says: “…he was just generally curious. I think that’s the other thing you see in the great investors, they are naturally curious. It’s not hard for them, it’s who they are.” (Proctor & Phillips, The Templeton Touch, 1983, 2012) p195 (emphasis added)
Mason Hawkins, founder and former CEO of Southeastern Management and its Longleaf Partners family of mutual funds, with over $30 billion under management today, assesses John Templeton’s edge over other investors in similar terms: “I have not met a great investor who was not curious. That is one of the most underrated aspects of a great investor, curiosity. A lot of people talk about patience, discipline, and courage, but curiosity is one of the reasons great investors find the things they do, and it is also consistent with being a contrarian.” (Proctor & Phillips, 1983, 2012) p237 (emphasis added)
John Templeton wrote in his book The Essential Worldwide Laws of Life, as quoted by Scott Phillips: “It is important to branch out eagerly and learn in many different areas, even at the risk of being embarrassed or looking foolish. Are we able to admit that we do not yet know everything and are willing to learn? Learning is a desirable process that may include making mistakes along the road to knowledge.
True wisdom acknowledges that the more we learn about a subject, the more interesting it becomes and the more there is to learn.” (Proctor & Phillips, 1983, 2012) p250 (emphasis added)
Creative thinking
Dr. John Schott, a leading expert in the field of behavioral finance, talks about the role of the unconscious in creative thinking and how getting away and having quiet time may enable thought processes.
“Like the famous story of Kekule and the Benzene Ring, if you work and work, and think about things and then let your mind alone for a while, or even in Kekule’s case, in a dream, your mind is still working on those things at some level and it brings solutions to you. So, in Sir John’s [John Templeton] case, as somebody who was constantly working and thinking about things, I think when he worked on something for a long period of time, then the next day a new thought would occur to him; he had the capacity and desire to integrate that.” (Proctor & Phillips, The Templeton Touch, 1983, 2012) p354
The reference here is to a particularly famous discovery in science; the form of the chemical structure of benzene. Kekule, a German organic chemist in the 19th century, told of how the structure of the molecule came to him in a day dream.
Dr. Schott goes on regarding John Templeton: “He loved to read, and he read voraciously, and then he would take walks. He would take the time to think about what he was reading, so part of it was on the cognitive level, but the other part of it we have to assume was an unconscious phenomenon that he would cultivate during his power walks on the ocean.” (Proctor & Phillips, 1983, 2012) p355
If we don’t have access to a beach, the next best thing may be to get our insights in the shower.
A skeptical mind
There is almost no such thing in the world of investing as hard fact.
The reported quarterly earnings per share for a company are usually based on various interpretations of reporting standards and some pretty important and often unspoken assumptions. Financial statements are notorious for being capable of being massaged. Almost everything we read about the economy, the stock market and various investments is opinion.
Let’s be clear, there is a world of difference between facts and opinions. If we must be skeptical of facts, we must be doubly skeptical of opinions.
Howard Marks relates his experience during the 2008 financial crisis and lessons he learned. He writes:
“For me, one such lesson consisted of reaching a new understanding of the skepticism required for contrarian thinking. I’m not usually given to epiphanies, but I had one on the subject of skepticism.
Every time a bubble bursts, a bull market collapses or a silver bullet fail to work, we hear people bemoan their error. The skeptic, highly aware of that, tries to identify delusions ahead of time and avoid falling into line with the crowd in accepting them. So, usually, investment skepticism is associated with rejecting investment fads, bull market manias and Ponzi schemes.”
He adds:
“Skepticism is what it takes to look behind a balance sheet, the latest miracle of financial engineering or the can’t-miss story…. Only a skeptic can separate the things that sound good and are from the things that sound good and aren’t. The best investors I know exemplify this trait. It’s an absolute necessity.” (Marks, The most important thing illuminated: uncommon sense for the thoughtful investor. 2013) pp118-119 (emphasis added)
We learn both by study and the school of hard knocks to constantly keep a skeptical mind when looking as any information or views about investing. In fact, it helps to not only be skeptical but also somewhat cynical. Most of the world is a jungle where only the fittest survive. Most people in the business world and in the world of finance are looking out for themselves and not for you.
Counterintuitive thinking
An investor must also be able to think counterintuitively – i.e. must be able to override one’s intuitive feelings. In fact, it goes beyond that. One must be able to develop learned intuitions or learned instincts which are often counter to natural intuitions or instincts.
A classic example of this occurs when a stock, an industrial sector or the whole market is going down. One’s instinct is to cut and run. When a financial crisis hits, one’s instinct is to sell everything and hold cash until the storm blows over. But that may be precisely the wrong thing to do.
When a true generalized bubble takes hold, everyone figures this time is different and that the extraordinary times will just go on forever. One’s instinct is to ride the wave. But, counterintuitively, that’s the time to step to the sidelines.
In fact, I would hazard to say that the best investment decisions are frequently the ones that are counter-intuitive.
Conclusion
It’s not a soaring I.Q. Nor is it access to inside information. As Ben Graham tells us, the key is a sound investment process and the right character. The most successful investors in history have various personal qualities or traits that allow them to make good judgment calls over and over. All of these personal qualities can be cultivated by investors. That’s the encouraging thing. Through reading and building experience, (and working at it) over time, most reasonably intelligent investors can make a success of it.
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You can reach me by email at rodney@investingmotherlode.com
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