Value Investors Tribe

Author: Robert G. Hagstrom

In the part 1 of this book we understood the key temperamental difference which separates the superinvestors from the common investor. The power of focus investing and concentrated portfolio was clearly visible in the performance of the Buffett Partnership and the Charlie Munger partnership. However, the key question is what are the essential investment traits which can be applied in our investment? In this article we’d explore these essential criteria listed in Warren Buffett Portfolio by Robert Hagstrom.

• Think of stocks as business: Change in the mindset of investor to think of stocks as business and not some coupons, lottery or anything else makes a big difference. Warren Buffett has iterated this countless times and it makes total sense. Warren Buffett said “Your goal as an investor should be simply to purchase, at a rational price, a part interest in an easily understandable business whose earnings are virtually certain to be materially higher five, ten, twenty years from now.” One of the ways to install this mindset is to think locally; for instance while analyzing McDonalds, it helps to think what factors would I consider before buying McDonalds franchise in my city?

• Increase the size of your investment: In an Outstanding Investor Digest (OID) Warren Buffett explained “I wouldn’t want to buy anything where I wouldn’t want to put 10% of my net worth into it.” Having a conviction is only proven when the actions reflect our thoughts. After a well-researched business, wherein you’re confident about the investment, it is worth it only if the investment size is considerable.

• Reduce Portfolio Turnover: Constant buying and selling not only increases transaction costs but also interrupts compounding. Changes in businesses are slow so in a quarter or two, the chances are thin that the conviction with which you bought the stock has changed. Average holding period for an individual stock is only 6 months in US which probably explains why majority of the investors do not beat the market. It is important to ask, if you replicate what others (market) are doing, do you deserve to outperform the market?

• Develop Alternative Performance Benchmarks: Basis of focus investment is economic traits of the business and not the daily price movement. There are no businesses in the world which are not volatile; volatility is the very nature of businesses. Making decisions based on daily price movements and the volatility are rarely fruitful. The proper benchmark for decision making should be economic characteristics of the business such as its operational efficiency, relevancy of the product, production cost changes and similar others.

• Learn to think in Probabilities: Business by nature of it is volatile in nature. However to make accurate predictions of the future, it helps developing a probabilistic approach. When evaluating business, it helps to ask questions such as what are the chances the products of this business will be relevant five, ten or more years from now? What are the chances that the business will continue being low cost producer in the future? This approach also helps in comparing investment opportunities be it asset classes, different equities or similar other investments.

• Recognize the Psychology of Misjudgment: There are several psychological forces which tend to impact our decisions. It is helpful of these and cross checking if the decisions you’re making are based on facts or emotions or any other psychological factors. It helps being realistic and admitting that no matter how deep the analysis, there will be times where the investments will show losses, the business will suffer and practically embracing the reality.

• Ignore Market Forecasts: This is probably most important factor to be consider in today’s time wherein social media and other similar mass communication products are feeding investment ideas and forecasts every second. Developing an independent thought process and courage to go against the crowd is the single most important thing to start investments. If this is not your cup of tea, you’re most likely better off hiring an investment advisor or investing in index funds.

• Wait and wait and wait: Patience. If anyone were to summarize the most important characteristics of Warren Buffett and Charlie Munger, this would probably be in top one or two. Having the patience to wait for investment opportunity which is lucrative as well as having patience to hold the investment to mature separates man from the kids!

Disclaimer: The content in this blog is purely for educational purposes. We do not claim any copyright of the book Warren Buffett Portfolio, all rights reserved by the publisher and the author of the book