What makes a good value investor? While the purely number-crunching aspects of looking for undervalued stocks are well understood, researchers have done little to understand the role that character and temperament play in producing a successful value investor.
I and two of my colleagues at the Richard Ivey School of Business set out to rectify this gap by conducting in-depth interviews with 19 successful value investors in Canada and the United States. We found that successful value investors possess a consistent psychological style and similar attitudes to making money.
Based on our findings, I have developed a short questionnaire that you can use to help you judge whether you have what it takes to be a value investor.
Do you think there is a formula to achieve good investment results?
It's easy to learn how to look for stocks with low price-to-earnings ratios or low price-to-book values, but the value investors we interviewed insist that their success is not the result of a formula. Rather, they credit their investing prowess to their ability to keep their emotions in check and avoid psychological pitfalls. As Warren Buffett says, "It is emotional stability and inner peace about the decisions you have made" that leads to investing success.
A: Yes (0) No (1)
Would you be willing to buy a stock that has fallen to a 52 week low?
Interviewees felt that a successful value investor has to be contrarian and willing to do things out of the ordinary. You must be independent, avoid following the herd and not mind going out on a limb.
A: Yes (1) No (0)
Do you think that high IQ is the key to investment success?
Interviewees felt that investing success is not a matter of having a high IQ. It is more a frame of mind. As Mr. Buffett says, "Investing is not an issue of a high IQ. If you are in the investment business and have an IQ of 150, sell 30 points to someone else. Most wealthy people I know are exceptionally intelligent, but intelligence is not the key to their success. Rather it is their ability to approach investment decisions with a cool head and a steady hand."
A: Yes (0) No (1)
Do you buy a new car every few years?
Interviewees saw no need for change for the sake of change; they avoid flashy displays of affluence and don't like to show off their wealth. They live in the same house for years, stay married to the same person for decades, and drive the same car until it is too old to function.
A: Yes (0) No (1)
Are you low key – not necessarily anti-social, but certainly asocial?
Interviewees felt that living where the action is and participating in cocktail parties and other social events hurt the clarity of their thinking. They tend to be introverts and shy, avoiding the limelight. However, they do like to be with people they respect – and these are normally other value investors.
A: Yes (1) No (0)
The questionnaire contains five questions, worth one point each. If you scored 0 to 2, you are not a value investor, if you scored 3 or 4 you have the potential to be a value investor. And if you score 5? You are a value investor.
Our research continues. Stay tuned.
George Athanassakos is a professor of finance and holds the Ben Graham Chair in Value Investing at the Richard Ivey School of Business, Western University. Read more of his Globe and Mail articles here.
George Athanassakos