Ten Habits of Highly Successful Value Investors

Warren Buffett once said, “All there is to investing is picking good stocks at good times and staying with them as long as they remain good companies.” Keeping this in mind, this chapter presents ten things to remember as you evolve your value investing style.

1. Do the Due Diligence

As a value investor you must walk the walk — consistently, continuously, and with good form and focus. A value investor is rational and doesn’t jump into an investment without knowing why. In business, you can’t know everything, but you do need to examine the important stuff. Diligence continues beyond the purchase, keeping up with industry trends and company performance.

2. Think Independently and Trust Yourself

Be your own analyst. Do your own research and figure out what works for you. Don’t listen to sales pitches, gossip, and hype. Be different and be proud to be different. The more different you are, the more you’re likely to make in the market — in the long run. Think and act independently.

You’ve all heard this or that portfolio manager or talk show host espousing the virtues of his favorite stock. Few give solid fundamental reasons for their picks, and in many cases, they may actually be pumping positions they’re already in to make a sale. Remember, portfolio managers, Wall Street firms, and brokers are in the business to make money. Remember who’s who and
what they’re likely to want.

As a value investor, you should do your own research founded on real numbers emerging from the business. Chat rooms, TV, and industry and analyst forecasts are dangerous replacements for your own thinking.

3. Ignore the Market

Smart, well-equipped investors continually try to time the market. That approach been generally proven to be a waste of time. But more than that, buying a stock because of its price moves — particularly upward — is usually the worst reason to buy. Focus on the business and fundamentals and look at the market simply as a place to execute the transaction.

4. Always Think Long Term

This advice goes along with ignoring the market. A good business is a good business in the long term. Otherwise it isn’t a good business. And never, ever forget the value of compounding and how negative performance negates its effects.

5. Remember That You’re Buying a Business

Approach a stock purchase as though you were buying a company for yourself, even if you’re buying only a millionth of it. Look at it as a business, not a stock. Think inside out. Become an expert on the company and the industry — understand the business. Know how it makes its money. Be able to explain the business, the industry, and your rationale for buying the stock to a 10-year-old kid or any other bystander. By doing that, you’ll get better at explaining it to yourself.

And don’t forget that it’s your own money. This applies to all investing, not just value investing. It’s amazing how people throw good, hard-earned money at almost anything, spending as little as a couple of minutes to analyze and execute an investment.

6. Always Buy “On Sale”

As a value investor, you want to own a good business, but value investing goes further than that. You want to own a good business at an attractive price. Sticking to this rule expands the potential return and creates the margin of safety, sort of a “moat” around your investment. When you buy at a favorable price, you create room for error and greater room for growth and tie up less capital. The excitement and satisfaction that you feel when getting a bargain in real life also applies to investing — with much greater long-term benefits.

7. Keep Emotion Out of It

A Southwest Airlines flight attendant once admonished passengers who were apparently taking too long to select a seat, “You aren’t buying furniture, folks, just picking a place to park it for the next 50 minutes.”

The wisdom shared is about avoiding emotional attachments to stocks and the businesses they represent. If you “LUV” Southwest Airlines, don’t invest in it until you like the numbers. And if the numbers look good and you invest, but they start to look bad later, be able to recognize that. Value investors continuously look for the good and the bad and keep their rational wits about them as they decide to buy and keep their investments. The purpose of an investment is to achieve a greater financial goal and not to become a member of the family.

Don’t hesitate to admit your mistakes. As we want our management teams to do, so must we do for ourselves. Value investors admit their mistakes and learn from them. They take the time to understand what changed (or was overlooked in the first place), and they move on. They have a rational “sell” model and aren’t afraid to sell a business when underlying reasons to own it have changed or if the price is way out of line with value.

8. Invest to Meet Goals, Not to Earn Bragging Rights

Your investing should be aimed at one purpose: to earn money and build a secure long-term financial future. Other goals and objectives bring danger. Don’t try to be better than everyone else, and bragging about your two-baggers at the water cooler is bad form and bad practice. Sound, consistent objectives, with a sustained, consistent approach for meeting them, work best. Be the tortoise, not the hare.

9. Swing Only at Good Pitches

If something looks good, wait. There may be something better. This is one of the harder pieces of advice to follow. You see a company you like, and it’s selling at 75 percent of intrinsic value. Fundamentals look good, but there may be a question about intangibles. Should you buy? It depends. If you pulled a screen of 20 companies, look at them all. Try a different screen. And if the ones you find are a good value today, chances are, if you’re really playing for the longer term, they’ll be a good value tomorrow and even a few days from now. Patience is a core virtue of the value investor.

10. Keep Your Antennae Up

Stop, look, and listen. Always be on the lookout for signs, large and small, of opportunity. Be equally aware of what’s going on with companies you already own. Own Starbucks? Visit the place and have a latte once in a while. Own Ford? Rent one the next time you rent a car. Hilton Hotels? United Airlines?

You get the picture. If you own a business that makes air compressors and tools but have no need for these tools yourself, ask someone who does, such as your next-door neighbor/contractor. And if you wish to hang out in the rail yard counting tank cars as Mr. Buffett once did, remember to stop, look, and listen there, too.


Source: Value Investing For Dummies

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