Emotional Management And The Value Investor – Weekend Meditations by Balint Anton Francisc
Aswath Damodaran, Professor of Finance at the Stern School of Business at NYU, talks in great detail about the biases of company valuation in one of his lectures stating famously: ‘You tell me who pays you to do a valuation and how much you get paid and I’ll tell you almost all of the time what direction your bias is.’ Investment professionals are subject to market’s manipulative forces all the time: news about different events cause chemical reactions that impact our psychological structure (feelings) which are so strong that we tend to act on them. For example, we have all seen the blood shed of capital outflows from Aberdeen Asset Management, one of Europe’s largest investment houses: in the past year its shares dropped almost 50% and at the end of November 2015, the AUM have fallen from GBP 324.4bn to GBP283.7bn. Why this happened? Well, a combination of low oil prices, stormy commodity demand around the world and most importantly a gloomy outlook for emerging markets, Aberdeen’s largest investment landscape, have sparked such a panic inside investors’ hearts that they have pulled out their money in the blink of an eye.
Value investors, as a class of conservative capital allocators, are adding extra resistance in making their judgments: resisting market’s herd mentality is not enough – you must do so at the right time and for the right amount of time. This article aims to make you think about how you can become a better value investor by taking the lessons from Arnold Schwarzenegger and Michael Jackson.
You might think: what can these people that spent most of their lives as entertainers teach us, value investors? Well, they can teach you two main things. Firstly, their legacy is based on almost perfect emotional management. Secondly, I would like to show you that knowledge is a whole, one. Value investment as a philosophy has this idea at its core as all very successful value investors not only know finance and excel at mathematics but have a wide range of interests in fields seemingly unrelated to capital markets or business. For example, Ray Dalio encourages us to meditate and read history and Charles Munger is well known for his passion for human psychology. I would like to encourage you that through this article you think about emotional management as a process that necessarily combines other fields of knowledge with your profession as investors.
So what can we learn from Arnold and Michael? Let’s start with Arnold.
Emotional management – Lessons from Arnold Schwarzenegger, the philosopher-king
Arnold is well known for his six rules of success. These rules are the result of Arnold following a vision. To be able to do so consistently you need discipline and a very different mind-set than the people around you. Discipline comes from reverse engineering a particular mind-set. As he mentions in his autobiography, Total Recall, he trained his mind to be ‘cold’ and not allow externalities interfere with his training and preparation. In other words, he educated himself to detach from feelings, especially negative one upon which the mind tends to focus much more. Therefore, the first lesson is to look to develop mindfulness – the process through which we understand what we feel, why we feel it and whether or not to act upon that feeling. A good place to start is here and to read The Science of Mindfulness: A Research-Based Path to Well-Being by Professor Ronald Siegel.
Furthermore, Arnold realized that everything in life is ‘reps and mileage’. In other words, the more you do something the better you become at it. The key here is not to repeat an action, such as meditation without improving it! Value investors need to be consistent with their strategy. A very well thought investment approach based on logic and that accounts for human judgment might fail one, two and even three years in a row but in the end, as Joel Greenblatt states in his Little Book that Still Beats the Market, it will indeed beat the market. Remember that value investment is a long-term approach and requires consistent application of its fundamental principles. I am not suggesting not to ever change your strategy or not to build on it. In fact, legendary investor, Warren Buffett has built upon his strategy by bringing the vision of Phillip A. Fisher on the conservative lessons from Benjamin Graham. Therefore, by all means improve it if you can but the fundamental principles, such as margin of safety and looking for companies with large economic good will, need to be consistently applied. Consequently, the second lesson that made Arnold millions is a consistent approach of applying eternal principles – of course different from those of investment but nonetheless transferable.
Finally, the last lesson comes from Arnold’s ability to ignore the ‘naysayers’. As a contrarian investor, it is difficult to ignore all the noise that the markets and financial press bombards our minds. However, let’s follow Elon Musk’s advice and reason to fundamental principles. The planet has a limited amount of resources and limited places of where you can invest them. All this ‘danger’ in the markets is nothing more but cycles that will not last forever. Therefore, if initially you invested based on sound reasons, i.e. if you could make sense of what the business does and whether you have valued its moat in line with conservative expectations and not followed the loose monetary policy as an excuse to pay more than it is worth it, then you should by more of what you own not sell – obvious advice but it will be harder than you think. However, the third lesson is to ignore the noise around you: focus on what you know and work from there.
Lessons from Michael Jackson on perfection
Michael’s perfection as a singer and performer has nothing to do with musical taste. In fact, it is completely unrelated because it is objective. The alignment of body movements and music on stage might seem just like a very good performance that has nothing to do with the mind-set of an investor. In fact, we can learn a lot from Michael’s work. Firstly, to achieve the level he did in any profession you need to be completely in tuned with yourself – the thing you do has to be part of you. If you are in the investment profession for an empty reason or because your friends or family told you that it is a good career that is going to make you a lot of money then think twice. In order to achieve great success you need to account for chance, luck or randomness. The only way you can do that is to tilt the balance of skill vs. luck towards skill. However, as mentioned above, investment and especially value investment, is a mind game and you have to have the character traits necessary to deal emotionally with both success and failure in a rational way. You can only have this perfect alignment in your life if you do something that you value.
Secondly, Michael had the ability to speak his mind. As Bill Ackman demonstrates in Confidence Game: How Hedge Fund Manager Bill Ackman Called Wall Street’s Bluff, when you know you are you can prove your opinion and rationalize your argument on facts, you should defend your position. In fact, corporate raiders are a class of value investors in themselves – Carl Icahn being a particular name that comes to mind. Just like Bill Ackman called out Wall Street’s nonsense Michael spoke with passion about the music industry and accused big names for their lack of transparency, respect and cooperation with the artists. As a result, he got a lot of negative attention and criticism from the media but he stood his ground. Contrarian investors need to do the same: perfection in the field of investment is unattainable due to the element of randomness being always bigger than the skills you have. However, you can make more profit if you stand your ground when your research is sound.
The idea behind this article was to encourage you to think outside the conventional horizon of the financial world, especially when it comes to emotional management. We can learn from every field of knowledge and from all professions. Identifying a diverse range of principles and philosophies that will help you to discover yourself, to make accurate decisions and to deal with the world as it is, should be a goal set and achieved long before anyone engages with the capital markets.