Being Human and Value-Investing
December 16, 2014
One of the main lessons of value-investing is to separate emotions from investing. Value-investing is mainly research, bargain-hunting and patience. People, however, for which value-investing is for are emotional beings. That is why in the start, we did not like offering stock portfolio management services to the retail level or to the general public. They get nervous, impatient and can turn against you in some kind of tirade even if you are doing your job. Michael Burry, the fund manager who saw the sub-prime crisis coming, made millions for his clients by shorting CDOs. Despite this, he was shunned by his clients who saw his actions and minimal communication as risky and irritating. Michael Burry’s Scion Capital recorded net gains of 489.34% from November 1, 2000 to June 2008. He now manages his own money and said that investing without investors is the most freeing thing. That was what we wanted.
However, when a friend asks for your help and for your specialty, you can’t keep yourself from being human. It is an irrational decision to help since the friendship is at stake, and that is more valuable than yields and gains. An agreement was forged, but on the first stage of the service, the stock portfolio was forcefully made at the wrong time. A stock was also left out because it was found undesirable. Another take on the agreement and another stock portfolio was made. This time, 100% of the decisions were entrusted to Corpecon Research. This time, it was purely our show. The PSEi slumped, and the lesson of patience was painfully learned by our new value-investor.
Eventually, Stock Portfolio 1, which was forcefully, hastily and emotionally made, grew by 3.76% including cash dividends and was beaten by the PSEi which grew by 4.95% from 6,621 on June 19, 2013 to 6,949 on July 8, 2014. Stock Portfolio 2 grew by 14.65% including cash dividends and outperformed the PSEi which grew by 6.43% from 6,529 on September 19, 2013 to 6,949 on July 8, 2014. All gains were net of fees.
A trader found these gains small and claimed gains of 35% and even 55%. We just took this as is. We have our own detailed records of our investment. Many have beaten our performance in our first foray together as value-investors in the volatile Philippine stock market, and congratulations to them. Despite this, our performance put a smile on my friend’s face. Another lesson was learned, the stock market is not supposed to be hectic. After hard research is done, it’s about the timing when to plant the seeds and the long wait towards harvest time. We decided to take capital and gains out instead of just the latter as we saw the market headed towards irrational exuberance, and it did last September 25, 2014. With the patience of Job, my friend and two more others are now in the shadows until it is time to pounce and reinvest. Signs spotted from last Thursday to Monday already show it is coming soon.
To be successful and effective at value-investing means learning how to place emotions where emotions should be like with the family, singing a song or the having the moxy to succeed in a goal. Emotions can also aid people in value-investing such as having the cunning in bargain-hunting like Buffett, the fortitude in timing maximum pessimism like Sir John Templeton and the exuberance of compounding gains like Albert Einstein. People can’t be all logical like a computer. In fact, even the great father and son team of Irving and Thomas Kahn said that value-investing is both an art and science. Emotions placed in specific actions of value-investing enhances it, gives each value-investor identity and make them great.
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