Dec 23, 2009|
The one quality that sets investors apart
In most economic activities, a great deal of enthusiasm is a great asset. In fact, most entrepreneurs who make it big tend to be extremely driven. They pour a great deal of energy into executing tasks rapidly. Invariably, that is how they propel their firms to great heights.
Since investing in equities also has to do with businesses, surely enthusiasm must be a great asset here too. Not quite.
Investors must avoid enthusiasm
"While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster." - Benjamin Graham
But why is enthusiasm so dangerous in investing? Primarily because of the heuristics and biases inherent in our behavior. There are strong tendencies such as confirmation bias, herding and social proof that make investors enthusiastic at the wrong time. Often that time is when the markets have posted strong returns. Money making becomes too easy. Investors suddenly feel terribly enthusiastic. In other words they turn greedy. Businesses that are considered strong and have good prospects are given fancy multiples. Steeply priced initial public offerings (IPOs) are lapped up. Once that happens, all the excellent qualities that an investor brings to the table are put under a severe burden. To quote Benjamin Graham again, "It is no difficult trick to bring a great deal of energy, study, and native ability into Wall Street and to end up with losses instead of profits. These virtues, if channeled in the wrong directions, become indistinguishable from handicaps."
"All man's miseries derive from not being able to sit quietly in a room alone." - Blaise Pascal
The strongest antidote to the dangers of enthusiasm is patience. The reason is simple. In most economic activities, the results are an accumulation of several of decisions. When it come to investing for the long term, the 'buy'decision is disproportionately important. 'What you buy' and 'at what price'. In fact, Warren Buffett often says that if you get the 'buy' price right, you will do rather well for yourself even if don't time the 'sell' to perfection.
Since it is not possible to get the right prices everyday, investors must exercise patience. Mohnish Pabrai, the author of 'The Dhando investor', once wrote an interesting article titled 'Buffett succeeds at nothing'. He mentions how Warren Buffett and his partner Charlie Munger go through multi-year periods where they essentially just wait for the right prices. What do they do during that time? Play bridge, read book, study companies. They exercise patience.
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