A Matter of Character

hand mirrorWhile the technical aspects of value investing (screening for and valuing low P/E or P/B stocks) are well understood and documented, there has been no attempt to understand the role that an investor’s individual character plays in investing success even though anecdotal evidence does point to the importance of character and temperament. For example, James Montier believes that successful value investors are contrarian, patient, disciplined, unconstrained and sceptical.  And famed value investor Warren Buffett has frequently indicated that his successor must have the right temperament and a keen understanding of human psychology and institutional biases.

I decided to develop a less anecdotal and more formal and systematic understanding of what character strengths and virtues successful value investors embody.

Two of my colleagues and I at the Richard Ivey School of Business conducted in-depth interviews with 19 successful value investors in Canada and the United States and found overwhelming support for the importance of character in value investing.

The questions we asked and the typical answers we received are summarized below and point to certain core characteristics that value investors possess:

Q: When did you first identify yourself as a value investor? Was there a singular event that propelled you to become a value investor or that helped you realize that you want to be a value investor?

A: Interviewees felt that reading Benjamin Graham’s The Intelligent Investor and/or working in an environment with a senior manager who coached and mentored them in the value investing ideas and principles were the key contributing factors in their decision to devote themselves to the value investing style. Many interviewees also felt that they would have had a different professional life had they not read Graham’s book.

Q: You have been a committed value investor, what has kept you committed over the years?

A: Interviewees agreed that they have been committed to the style because value investing works and makes a lot of sense.

Q: Given the success of value investing, why don’t you think other investors follow this path?

A: Interviewees felt that either one gets it right away or does not, and there is nothing one can do about it. One also has to be in the right environment to excel in value investing. The formula is easy but the application of it in the psychological and emotional sense is very hard.

Q: What makes a good value investor?

A: Interviewees felt that one has to be contrarian, patient and disciplined and be willing to do things out of the ordinary.

Q: What is the most important thing you have learned in life and investing?

A: Interviewees invariably felt that it is humility, integrity and independence.

Q: What is the character strength that helped you the most in your career?

A: Interviewees felt that it is humility, courage, confidence, perseverance, integrity, open-mindedness.

Q: Can these character strengths be taught in the profession? Or one is born with them?

A: Interviewees felt that genetics play a big role, as well as family upbringing. But they also felt that character has to be honed in the right environment.  A value investor cannot work in an environment that does not adhere to the value investing principles. It is difficult to teach the behavior, as it is not an IQ thing. It is more a frame of mind in making decisions. If one has the right frame of mind, everything falls into place.

Q: What kind of behaviors do you look for when you hire someone?

A: Interviewees felt that it is conviction and belief in oneself. The kind of stocks he/she has bought and whether he/she has looked at the balance sheet, as well. Life style is also important. Does one need to buy a new car model every year? How long has one been married to the same person? What is the family background? Is making money a motivator?

Q: How do you know that someone is a value investor?

A: Interviewees felt that value investing is closer to being a profession whereas running a money management firm is a business. They want to know if a person is in it to make money or for the love of what he/she does. They want to know if a person has got the “religion” and has convinced him(her)self that he/she is a value investor.

Q: How different are value investors from other investors?

A: Interviewees felt that value investors tend to be low-key, not necessarily anti-social, but certainly a-social.

Q: What character strengths were most helpful in bear markets and in bull markets?

A: Interviewees felt that a good value investor is indifferent to what the market is doing and has conviction in his/her analysis.

Q: How do you deal with client pressure to manage investments differently than you think is wise?

A: Interviewees felt that one needs to educate clients.  Sometimes clients need to be fired, too.

Q: Are there any institutional barriers to becoming value investor?

A: Interviewees felt that it is difficult to be a value investor in an environment of quarterly performance evaluations. One can be right in the long run, but lose his/her job in the short run if his/her portfolio looks different.  That is why in this environment portfolio managers tend to become closet indexers. As Keynes used to say, “It is better to fail conventionally than succeed unconventionally”.

Research is ongoing.  Stay tuned.