Across several articles here on ilucidy, I have repeatedly brought up or referred to Value Investing in one way or another. I have also previously mentioned that Value Investing is the investment paradigm I adhere to.
This article is not meant to be some sort of implicit attempt to convince you to become a value investor.
First and foremost, ilucidy is open for everyone. Although articles have a focus on young Canadian investors, anyone is more than welcome here – Canadians, international visitors, value investors, commodity traders, individuals who one day want to start investing, etc.
Also, the debate surrounding Value Investing is as old as value investing itself. Like any other philosophy, there will always be supporters and critics of it. I am not here to take a side then attempt to discredit the other argument.
Rather, the purpose of this article is to demonstrate my process of how I ended up deciding to go with value investing, and to hopefully guide you to picking an appropriate investing paradigm as well.
Selecting an investment paradigm isn’t as simple as picking the one most investors adhere to. What works for some investors may not work for you, and that’s absolutely fine.
The paradigm an investor chooses to follow is important, yes, but what matters more is finding a paradigm that works the best for you.
Nobody likes to follow a set of actions and beliefs that fundamentally go against who they are.
In the following sections, I will explain my reasoning behind why I specifically chose to adhere to Value Investing. I hope that my past reflections and experiences will help guide you in selecting a paradigm that works best for you.
Investing is an Art and a Science
Countless people have spoken about the scientific aspect of investing.
By scientific, I am talking about the myriad ways we rigorously look at an investment operation – quantitative analysis, qualitative analysis, tax treatments, industry analysis, etc.
Investing’s scientific aspect has been studied, understood, and continuously refined for more than a century now.
While there is no shortage of discussion concerning investing’s scientific side, I believe that too few people pay enough attention to the artistic element of investing.
When I say artistic, I mean the human aspect of investing. Being an investor does not mean analysis is limited to the domain of numbers and data. As I’ve previously discussed, understanding a company’s soft factors are just as important as crunching the numbers.
Not only does the human aspect play such a big role in investing, but it is not limited to just analytical work.
At the end of the day, every investor is human (unless, of course, you have A.I. performing trades, but every A.I. was designed and created by a person).
What separates humanity from software is that humans have a set of beliefs and values they adhere to: a set of conditions we impose on ourselves to guide our every action and decision, both large and small, conscious, and subconscious.
All of us, knowingly or unknowingly, view the world through our own unique lenses. What makes sense for some people may seem absolutely ridiculous to others.
Because we each have a set of beliefs and values we adhere to, when presented with a new way to look at the world we either accept that way of thinking immediately or fervently reject it.
Knowing Thyself
It is no secret that every person is unique, especially when it comes to our psychology.
Now, I’m no psychologist, but you don’t need a degree in psychology to know that everyone’s minds are wired a bit differently.
Some people are naturally more patient than others, while some don’t like to wait around. Some people are very risk-averse, whereas for others, biting the bullet may come very naturally to them.
Everyone has their unique dispositions, some that may be beneficial, and others that are detrimental.
Before starting to invest, it is absolutely crucial that an individual understand the type of person they are.
I don’t mean some half-hearted reflection performed as part of a daydream: I mean a very deep, very serious, and very thorough look at oneself. Such a reflection may take several days or even a couple of weeks to properly perform.
I’ve brought this up time and time again; an investor’s worst enemy will always be their own emotions. Nothing derails an investor’s career faster than succumbing to their emotions, regardless of how much brainpower that investor may possess.
This may lead to the false conclusion that the solution is for an investor to be emotionless – to throw away any sort of ability to feel and settle on becoming nothing more than a robot.
Being an investor doesn’t mean we must cast aside our emotions. Instead, it means we must learn to discipline and contain them.
By taking the time to understand who you are, you know exactly which emotional strengths to maximize, and which emotions should be kept on a tight leash.
What I’ve Discovered from My Own Reflections
I am not the type of person to suggest something then proceed not to practice that advice myself. I eat my own cooking.
So, I will share with you what I have learned about myself after years of consciously and subconsciously reflecting on the type of person that I am.
Ever since I was a child, I’ve always loved to perform analysis. Whether it was figuring out a math problem or trying to best optimize how to beat my Pokémon games, I love to look at a problem and break it down into its components, trying my best to understand how to effectively solve it.
Acting impulsively has never really been a problem for me. If I wanted to spend time with friends, there was always a plan for the day to be followed – spontaneity has never been something I liked.
Some people proudly say they follow their heart rather than their head, but in my case, it has always been the opposite. Doing what my gut tells me to do has always been my last resort.
My disposition to analyze has been both a blessing and a curse. I have repeatedly fallen victim to analysis paralysis. That is, there have been countless instances where I spent too much time thinking and not enough time taking action.
Not only do I love to perform analysis, but I am also very frugal.
This frugality is partially due to my upbringing and is also partially due to my disposition of not wanting to spend more money than necessary.
When I buy something, whether it’s clothing, food, movie tickets, or something as mundane as a chocolate bar, I actively try to find the best deal possible.
Nothing attracts my attention faster than seeing the words “on sale”.
Purchasing a product at full price is something I’ve never been fond of doing, since I know that the spread between the mark-up and the actual cost of manufacturing the product is usually significant.
Looking to buy a product has always been an exercise of determining how close I am to paying for a product’s “true” value. If I feel that a product is too far from its true value, then I will not purchase it.
Nothing agitates me more than the saying “you get what you pay for” since this implies that a product or service’s quality is directly proportional to its price.
From experience, I know this saying is false because I have bought products and services that did not have “premium” pricing but were still very high quality.
Finally, I have come to realize how patient I truly am, specifically my ability to wait for a big reward down the road.
In psychology, there exists a term called delayed gratification. Put plainly, this is the ability of a person to forego a reward right now in favour of an even greater reward later.
There have been several instances throughout my life where I chose to exercise delayed gratification. A vivid memory of me choosing to delay gratification was back in 2010.
My birthday is on April 16, and at the time there was a video game that was on my radar: Super Mario Galaxy 2. One problem: Super Mario Galaxy 2 came out on May 23, 2010 – more than a month after my birthday.
Naturally, I decided to simply wait it out. To me, the decision to wait was a no-brainer, because I knew the wait would be worth the reward I would ultimately receive.
My Compatibility with Value Investing
When I first started to learn about investing in 2014, and when I discovered Value Investing for the first time in early 2015, Value Investing immediately resonated with me.
Let’s look back at the results of my reflection: I am analytical (with a tendency to succumb to analysis paralysis), frugal, like to buy things at a discount, and am able to delay gratification.
Now, let’s compare these insights to value investing. The major two major principles behind value investing are intrinsic value and margin of safety.
A value investor’s goal is, upon thoroughly analyzing a prospective investment operation, ensure that the investment is purchased below its intrinsic value, and to ensure the spread between the intrinsic value and market value is as wide as possible.
Value investors are essentially people looking to buy something at a discount. They don’t believe that the merit of an investment operation is commensurate with its price, and so they endeavour to find an investment’s “true” value.
When a potential value opportunity presents itself, a value investor needs to act quickly. There is no telling when the market value may match or exceed the intrinsic value.
Because not every prospective investment will be priced below its intrinsic value, or the margin of safety is too narrow, a value investor must learn to be patient when there are no attractive buying opportunities.
Even if a value investor purchases an investment below its intrinsic value, it will take time for an investment’s market price to approach its intrinsic value, if at all. An investment may approach its intrinsic value in a few months, or in a few years.
There is a lot of overlap between my own dispositions and the major principles of Value Investing, so it came as no surprise to me when I found myself naturally being drawn towards this paradigm.
Notice how I did not force Value Investing upon myself, nor did anyone force it upon me. I simply took the time to understand what sort of person I am, then came across a paradigm that resonated the most with my own beliefs, values, and dispositions.
Finding What Resonates with You
I want to make this abundantly clear: I do not endorse Value Investing as the superior or “correct” investing paradigm to adhere to.
Every paradigm has its strengths and weaknesses, and naturally, Value Investing is not exempt from that reality.
Value Investing is definitely a popular investing paradigm many investors choose to adhere to, but I did not adhere to it simply because other people also choose to do so.
I am a Value Investor because it best aligns with who I am as an individual. To me, Value Investing makes so much sense because I have unknowingly been practicing its principles throughout my life, long before I even knew what the word “investing” meant.
Of course, in today’s investing landscape of high-frequency trading and the dominance of technology companies, a growing number of investors are challenging the merits of Value Investing.
Not everyone is suited to be a value investor. Some people are better suited to the fast-paced world of day trading, others may simply choose to play it close to the chest and invest in index funds, while others are more attuned to Growth Investing.
Based on my experience, there is no “correct” style of investing, there are only styles that make sense for the individual.
However, an individual cannot possibly hope to find which style of investing best suits them if they do not fully understand themselves.
Once an individual understands who they fundamentally are, then the investing style that best suits them will become a lot easier to identify.
Wrapping Up
Before starting to invest, a prospective investor needs to have a clear idea of what investment paradigm they intend to follow. Investing is not an activity where you achieve success by accident.
Choosing an investment paradigm isn’t necessarily a matter of which one most people adhere to, but rather which one best aligns with an individual’s beliefs, values, and dispositions.
Once an individual has a clear idea on the type of person they are, then identifying which paradigm best suits them becomes a much easier task.
I am a value investor not because other investors choose to follow its principles, but rather because its principles and my own beliefs, values, and dispositions align almost perfectly. In my mind, any other paradigm would be a poor fit for me.
By taking the time to understand yourself, almost everything else will fall neatly into place.
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