The Most Important Thing That Counts in Investing

One story from World War II that I found as tragic as it was magnificent was that of Anne Frank.

Frank was born in Frankfurt, Germany but moved to the Netherlands for safety in 1934, five years after she was born. The Frank family hid in their basement with four other Jews when Germany took control of the Netherlands.

Anne then began to write, at age thirteen, in a diary of her life, feelings and the outside world. She wrote in the diary every day for two years until their hiding place was found and she was forced into a concentration camp where she died with her sister due to a sickness. She was just fifteen when she died.

Although Anne wasn’t only a tragic girl in this war, her diary that is available to read as The Diary of a Young Girl displays the strength of her character. The diary portrays her as a brave and hopeful girl, character traits that are hard to manage in the kind of hardship that she was a part of.

One of her diary entries reads –

Human greatness does not lie in wealth or power, but in character and goodness.

Strong character is what Anne displayed through here little life. And strong character is what makes people great in their lives.

In the broader scheme of this Universe, even when I look at an unimportant field like investing, I find that investors who have done wonders for themselves are the ones who have displayed strong character at various points in their investment lifetimes.

By the way, I am not talking about those who have done well over the past few years (thanks to a genial market environment) because they have not yet been tested for the strength of their characters, but of those who have stood the test of time over more than a decade.

The thing about character is that no book or course can teach you on this, though very few of them talk about how you can gradually build it. Ben Graham’s The Intelligent Investor is one of them. Seth Klarman’s Margin of Safety is another. Philip Fisher’s Common Stocks Uncommon Profits is the third. And then you have Howard Marks’ memos and Warren Buffett’s letters to shareholders. Most of other stuff written on investing through the years, including this blog, is just commentary.

Anyways, if I were to draw down the lessons I have learned from these books and from watching successful investors on building a strong character required to do well in investing, here are five traits that stand out –

1. HUMILITY, especially intellectual.

Being humble in investing isn’t about being doubtful of yourself, or believing that you are untalented, unintelligent, or unworthy. On the contrary, it is about being humble about our own intellect, to question whether what we know is actually correct and even to adjust our beliefs if we are presented with new information. In other words, it is largely to do with intellectual humility.

As Philip Tetlock wrote in Superforecasting, true humility (in investing) is about recognizing that “…reality is profoundly complex, that seeing things clearly is a constant struggle when it can be done at all, and that human judgment must, therefore, be riddled with mistakes.”

Very few investors have the nerve to say, “I don’t know.” But that’s how you build humility in your investment process. If you start with “I don’t know,” then you are unlikely to act so boldly as to get into trouble.

2. INTEGRITY, which is the quality of being honest and having strong principles.

Successful investors focus on their investment process with unwavering steadfastness and honesty, whatever the stock market is doing and however others around them are behaving.

They show how, to be a successful investor, you must have a philosophy and a process that you stick to even when the times get tough. This is very important. If you don’t have the courage of your conviction and patience and toughness, you can’t be an investor because you’ll constantly be driven to fall in line with the consensus by buying at the top and selling at the bottom.

But it’s important to know that no approach will allow you to profit from all kinds of opportunities in all environments. You must be willing not to participate in everything that goes up (like what’s happening now), and only the things that fit your process and investment approach.

3. TENACITY, which is the determination to work hard and keep faith in your investment process and the power of compounding.

Over the years I have met a multitude of investors who knew about the power of compounding, but very few who truly understood its real power because that shows up not in one, three, or five years…but ten, fifteen and twenty years. And in an age of instant gratification, since not many have the tenacity to hold on to their faith in this power and in high-quality companies to create wealth, not many investors end up successful.

American investor, hedge fund manager, and philanthropist Leon Cooperman is quoted as saying –

It doesn’t matter whether you are a lion or a gazelle; when the sun comes up you’d better be running.

Cooperman is seemingly talking about the importance of hard work here, which is a direct offshoot of tenacity. Sensible investing is hard work.

But then, Jesse Livermore, one of the greatest stock speculators of all times, is supposed to have said –

The main reason why money is lost in stock speculations is not because Wall Street is dishonest, but because so many people persist in thinking that you can make money without working for it and that the stock exchange is the place where this miracle can be performed.

Warren Buffett has said –

I learned at a very early age how important it is to work hard and be honest.

Hard work you put in identifying businesses you want to own, and then the hard work you put in just staying put, doing nothing, is what should help you succeed in your investment endeavors. There are no shortcuts to the top.

4. SELF-AWARENESS, which is the conscious knowledge of one’s own character and abilities.

George Goodman aka Adam Smith wrote in his book The Money Game –

If you don’t know who you are, [stock market] is an expensive place to find out.

Mere gathering of facts and bookish knowledge can only lead us to chaos. That chaos is what causes most people to fail in their investing lives despite all the books they read and courses they attend. While it is obviously necessary to read the wisdom and ideas contained in all those great investment books, they will only help us with the “techniques.”

But without understanding ourselves, those techniques would only lead us to frustration (maybe, an ‘intelligent’ frustration) and ultimately failure.

In studying successful investors over the years, I have come to realize that the right kind of investing education comes with the transformation of ourselves, which entirely depends on our awareness of ourselves – our behaviour, risk-taking capacities, and habits.

When we are aware of ourselves, we are in a better position to behave well. And that can help us save ourselves from self-destruction that most other investors lead them to.

5. ADAPTABILITY, which is the quality of being able to adjust to new, changing conditions.

This is the core of Charles Darwin’s theory of evolution –

It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is most adaptable to change.

Adaptability is one of the few skills that are hard to learn but pay off for the rest of your life.

Given the ever-changing world we inhabit, and given that this change is unlikely to ever slow down, what mattered very much yesterday (e.g. skill, knowledge, etc.) might not be worth a dime tomorrow. Change used to be slow and incremental: now it is rapid, radical and unpredictable.

Adaptability enables us to dwell on new circumstances and stay on top of the situation. Of course, this skill is best when combined with insight, giving us fresh perspective before the change itself. Growth depends on how adaptable you are.

Prof. Sanjay Bakshi told me this in an interaction some time back –

If you bought the right type of business, then there is likely to be a tendency for it to deliver better than what you envisaged. If you see that tendency play out after you have invested, don’t ruin it by staying with the original model. Your model has to be adaptive. If the performance is far better (or worse) than you envisaged, you have to change the model unless the improvement (or deterioration is likely to be temporary).

As Keynes used to say, when facts change, I change my mind. You have to have the same mindset when it comes to investing in both directions. That is, if the business is delivering far poorer performance than what you had envisaged earlier, and that performance is likely to continue because the moat is impaired, then your original model needs to be re-worked and it may well turn out to be the case that you should sell the stock. You have to have the ability to be detached from the outcomes, based on dispassionate analysis of real, meaningful data (not noise).

Combine adaptability with agility in these changing times and you have the right ingredients of success as an investor.

Oh, It Takes Time!
The thing about character is that it cannot be strengthened quickly (not the least by reading posts like this one) and in ease and quiet, but only over time and often through the experience of trial and distress during a crisis.

In fact, character often does not come out as a result of crisis, but in a crisis – like during 2000, 2008, and 2020.

Character also comes out during heady times – like during 1999 and 2007, and then now, when your humility, integrity, and tenacity are tested by the overdose of easy and quick money that you and investors around you are making.

Charlie Chaplin said that a man’s true character comes out when he’s drunk. Well, my advice is to learn your lessons from watching others in the stock market who often get drunk on arrogance, fear, greed, and envy. Then, avoid being like them. Over time, you will end up building a strong character.