Source: Buffett Book Club

We often say that investment requires “being able to withstand loneliness and maintain prosperity.” First and foremost of these is “enduring.” I've heard people say, “Some people may not be naturally suited to investing,” but I was not convinced. I always felt that not being able to invest well was just the reason I didn't understand it.

When I read Munger's words again, I found that there are quite a few friends around me who are like this. They always like to worry. Will this company's performance in this quarter be so poor, will it fall to a standstill? The macroeconomy is bad, and the market has no chance! The epidemic continues like this, and the stock market has not been saved! After making a profit, going up and down, cutting positions once... Naturally, people who can't stand it also read less, and why do detailed research and comprehensive analysis; in the face of a good company, it is naturally difficult to persuade themselves to slowly wait for a good price to appear before buying; even if you get a good company, once things go wrong, it's also difficult to hold on to it.

Graham said, “A successful investor often has a calm, patient, and rational temperament, while speculators, on the contrary, often fall into anxiety, impatience, and irrationality. Their worst enemy is not the stock market, but themselves. These people may have extraordinary abilities in math, finance, and accounting, but if they can't control their emotions, they naturally won't be able to profit from their investments.”

Graham is so aware of the stock market's emotional turmoil that many modern psychologists can't help but sigh. He believes that real investors are not only competent, but also because of their unique temperament. This view was not only suitable then, but is still applicable today.

These temperamental characteristics diverge investors in behavior. Speculators try to predict price changes and profit from them, while investors only seek to buy company shares at a reasonable price and hold them for a long time to wait for value to blossom.

In both the books “The Essence of Investing” and “Graham's Growth Stock Investment Strategy,” the author mentioned that successful value investors require a good “temperament.” The essence of this temperament is Graham's patience and rationality. Judging from years of financial experience, we believe that successful value investors also need to be humble, studious, and have a special shareholder temperament.

1. Patience

Real investors won't be carried away by the warm atmosphere and bustling and sexy conceptual appearance, but rather wait for the right opportunity to appear. More often than not they objected rationally, rather than blindly followed.

Discovering value requires patience. Peter Lynch appreciates the “stone-turning value investment strategy,” which means investors need to be good at “turning stones” in a down-to-earth manner. They have looked at thousands of companies, but there are few that can get a heavy position in the basket. The heavy work of “turning stones” must mean unusually hard work, often repeated and without results, but this is basic work for investors. Edison conducted 1,200 tests and failed 1,200 times to find materials suitable for making filaments. Others said to him, “You've failed 1,200 times, do you want to keep going?” Edison said, “No, I haven't failed; I've discovered that 1,200 materials are not suitable for filament.” Most of the work done by investors uses exclusion methods. However, in order to find a small number of real good companies, in addition to physical strength and mental strength, investors also need patience and willpower support to insist on the goal of finding good companies during this period.

While recalling working for Graham-Newman, Buffett said his job was to analyze stocks he might buy, while Graham rejected his suggestions most of the time. Buffett said, “Graham would never buy a stock unless all the facts were in his favor.” From this experience, Buffett learned that being able to say “no” is one of the biggest advantages for investors. Don't worry about saying “no.” Carefully evaluate every investment opportunity, as if you were only able to make 20 investment decisions in your lifetime.

Buffett believes that today, too many investors feel they have to buy more stocks (although they are bound to be unremarkable) rather than wait patiently for a few good companies to appear.

To reinforce Graham's teachings, Buffett often used the analogy of a punch card. He said, “When investors make investment decisions, it's like they have a decision card; they only have 20 chances to check in in in their lifetime. Every time an investment decision is made, a hole is punched in his decision card, and the number of times he checks is reduced by one.” Restricting investors' behavior in this way will force them to learn to be patient and wait for truly favorable investment opportunities to surface.

Value growth and compounding effects require patience. After the opening of a position is completed, in order to achieve the target return, the compound interest effect needs to occur, and compound interest takes time and requires patience. There are many friends who are good at cutting bottom. They buy good companies, but they often sell them after only making a few points. We still recommend investors not to seize multiple opportunities to make small money, seize good company opportunities to buy, place heavy bets, and then wait patiently — endure loneliness and maintain prosperity. The author has been sticking to Fuyao Glass for 11 years, Tencent, Ping An for 8 years, Biotech Co., Ltd., and Longji Co., Ltd. for 3 years. The root cause of these earnings is the company's value growth. Everyone who has worked in the industry knows that whether it's implementing R&D results, improving product yield, or building a team, nothing can be done overnight. There is no increase, but it is getting longer. The accumulation of quantitative changes is not easy to detect, yet unwittingly, these companies have all achieved growth and transformation.

DGI Fund Manager Martin, author of “Graham Growth Stock Investment Strategy”, began investing in Apple, which also specializes in PC computers, in 1998. The position building process was not completed until 2002. By 2013, when Apple entered the mobile intelligence era, Martin's return on investment had reached more than 50 times.

2. Calm down

Stock prices rise and fall under the influence of various rational and irrational forces in the market. When the stock price falls, they face it bluntly because they know very well that as long as the company still has the qualities that initially attracted investors, the price will rebound sooner or later. So, of course, they won't panic.

When a stock, industry, or mutual fund suddenly becomes a hot spot in the market, retail investors will flock to it. But trouble ensues, and when everyone thinks of themselves and makes the same choices, no one will be able to make money. At the end of 1999, “Fortune” magazine published Buffett's opinion: the popular “PATY must not be missed” idea made many bull market investors fond of it. Buffett's intention is that real investors don't have to worry about missing the party at all; what they are worried about is that they aren't ready to participate in the PARTY.

How to deal with market fluctuations is a litmus test for value investors. To describe the madness and unconsciousness of market fluctuations, Graham created a “Mr. Market” allegorical image. Buffett often shares the story of Graham's “Mr. Market” with Berkshire Hathaway shareholders. Imagine: You and Mr. Market are partners in an unlisted company.

Every day, Mr. Market will go out of his way to give a price, rain or shine. According to this price, he is willing to buy the shares you hold or sell the shares he holds to you. You are both lucky to have a stable business, but Mr. Market's offer is completely marginal because Mr. Market is emotionally unstable.

Sometimes, he is very happy, very optimistic, and feels that the future is bright. During this time, he will offer you a very high price for the shares you hold. Sometimes Mr. Market feels discouraged, pessimistic and tired of the world. At this point, he can only see immediate trouble; he doesn't see any hope for the future. He will quote a very low price for the shares he holds.

When Mr. Market is extremely pessimistic about selling, rational investors often choose to buy big, because at this time, the margin of safety is greater, and the return on investment in the future is higher. In our opinion, Mr. Market is an intermittent maniac. Choosing to follow Mr. Market fanatically or use Mr. Market calmly when making investment decisions has become a litmus test of whether investors are rational enough.

On this point, Buffett's point is more straightforward: you shouldn't invest in the stock market unless you can remain calm when your investment depreciates 50%. He also added to this statement: As long as you are satisfied with the company you own, you should accept the decline in its stock price, because you can only make more money by buying when the stock price falls.

Value investors never mind being left out in the cold. For an investment to be successful, investors first need to have good judgment about the enterprise and avoid letting the emotional vortex unleashed by “Mr. Market” influence their own judgment. A very important factor in Buffett's success is that he has always avoided the distractions of stock market sentiment. He credits this to Graham and Mr Market, who taught themselves how not to be affected by market sentiment. Investors are concerned about whether they can get more value in the future; other people's transactions have nothing to do with themselves. If rational investors are optimistic about a company, they won't mind the company being thrown in the trash by “Mr. Market,” let alone whether their opinions about this company will be approved by “Mr. Market” and various gods.

More than 60 years ago, Graham began studying irrational phenomena in the market and made people aware of this “Mr. Market” for the first time. However, more than 60 years have passed, and the times are progressing rapidly and the company is developing rapidly, while the evolution of human nature is slow. There has been little to no noticeable change in investors' behavior. Investors are still engaging in all kinds of irrational behavior. Dumb mistakes are repeated day by day, and fear and greed still persist in the market.

3. Rationality

Successful investors are neither overly pessimistic nor blindly optimistic. Instead, they always think logically and act rationally. Buffett was puzzled by the fact that too many investors are used to excluding markets that best serve their best interests (such as the good buying opportunities brought by a plummeting market), but prefer markets that are always bad for them (for example, rising water levels make companies' stock prices more and more expensive, and excellent companies generally lose their investment value and margin of safety). They are ecstatic when market prices rise and sigh when prices fall.

According to Buffett, when everyone starts to fall into pessimism, real investors are happy because they've finally waited for a good opportunity: buy the best companies at a discounted price. He said pessimism is “the most common reason prices fall... We just want to start investing in this kind of environment, not because we are pessimists, but because we like the opportunity to buy at low prices brought by pessimism. Optimism is the real enemy of rational buyers.” He always acts according to the general emotional tone of the market, “making himself fearful when others are greedy and making himself more greedy when others are afraid.”

Investors with a rational temperament will find good investment opportunities from the perspective of value discovery and “place heavy bets” on heavy purchases when meeting target returns.

Rational investors are not bound by emotions or stubborn opinions; discovering truth and value is their top priority. When you notice that you have made a mistake in your judgment or that the company's growth is showing signs of deterioration, resolutely clear the inventory. Even in an industry they once loved or a project they put a lot of effort into, they will resolutely deny themselves when objective facts and assumptions of future returns do not support future value expectations. This is their discipline. Of course, if you refuse to acknowledge mistakes in investing, you are bound to fail.

Rational investors will avoid following the flock and act recklessly. The process of investing is actually a process of finding opportunities for other investors to overlook or make irrational decisions. During the 2020 pandemic, the stock prices of excellent good companies were discounted one after another against the backdrop of a meltdown. At a time when the market was panicking, even the elderly Buffett family said “see you for a long time”. What rational investors need to do at this time is to buy decisively. We did this, and of course the subsequent market gave us a big reward for our rational decisions.

Rational investors don't join the market right away by listening to market news. Pies don't fall from the sky; only traps. Rational investors will objectively view the actual progress of the industry and the company's development, or ultimately confirm the long-term (growth or not) certainty of the company through repeated research and inspection, and verification. Rational investors often ignore bad news and management claims. Some companies have developed rapidly in the short term, but the sustainability of their long-term growth is worth discussing; some companies continue to pay dividends but have few profits and heavy debts; some management tells you that the company will make a big move recently, then you take over at a high level, and then they drastically reduce their holdings.

Munger believes that the core competency of investment, the most important ability is the ability to maintain rationality, emotional stability, and always be rational in the face of stock price fluctuations. Knowledge and valuation of a business are foundational, but only if you can understand, be rational, and emotionally stable. But what is rationality?

Munger further explained that rationality means seeking truth from facts. However, when most people look at the world, they see the world they want to see. If so, it's like looking at this world through deformed glasses; it's useless to have much knowledge or patience. Because the world you see is just disconnected, without a rational attitude, nothing else works.

IV. Shareholder temperament

Many people buy stocks without knowing the company behind them, or simply because the name of the stock or the business behind it fits a certain concept. Its money-making model is to expect a rise after buying. Where does this ideal model make money? It was probably bought by Lao Wang next door. And the loss of the old king next door could lead to a tragedy. The money earned from this model is, in a sense, legal, but it is still full of human blood and full of harm. If we determine that we are shareholders, we will consider that we should obtain profits and dividends from the proper operation of the company — this is the company's return for supplying products and services to society.

In fact, a stock legally represents an investor's certificate of interest in the company's ownership. Therefore, to buy a stock is to buy part of the company's ownership, and the intrinsic value of the stock is the intrinsic value of the company. Like corporate shares in unlisted companies, it's just that stocks can be freely traded on the securities market.

Benjamin Graham: To buy a stock is to buy part of the company; treat the stock as part of the company's ownership. To be successful in the stock market, you must first think correctly; then, you must think independently. Obviously, establishing shareholder awareness is a prerequisite for proper thinking.

Figuring out the significance of buying stocks is to buy ownership of a company, which helps investors move from entry to advanced understanding.

In particular, ordinary investors tend to take current earnings per share very seriously. This is a simple financial mindset. However, when he considers problems from the perspective of the owner of the company and sees himself as an operator, standing alone in the company's empty yard thinking about the competitive environment and future development prospects of the company, it is easy for him to break out of financial thinking and enter into commercial thinking.

Shareholders need to have both a financial mindset and a business mindset. Most financial investors only think financially, but “financial thinking puts too much emphasis on profit. This has the following 3 drawbacks:

(1) Adopt a normal business mindset. Buying a company requires double consideration of assets and earnings. Double consideration is more reliable than a single evaluation method that emphasizes profit.

(2) Compared with assets, earnings per share have changed more drastically, so stock valuations include an exaggerated kind of instability.

(3) Earnings per share can easily be manipulated by humans. Investors must combine balance sheet data from the beginning and end of the period to be able to truly understand the significance of the income statement. (The use of earnings per share requires investors to comprehensively consider factors such as the quality of the company's debt, growth cycle, and industry cycle before it has reference value for valuation.)

The most important thing we should do in the investment process is to return to common sense and invest with normal business thinking. Take net asset value as a starting point and stick to it before considering other factors”.

At the same time, once we have a shareholder mindset, we can easily accept the idea that investors are entrepreneurs — investors participate in social value creation in the form of equity investment and securities investment.

Unlike entrepreneurs, we have more meaning in allocating assets, and we have more choices — selectively allocating capital to companies that can create positive value for society in a sustainable and efficient manner. After having a shareholder mindset, investors will pay more attention to the company's investment direction and development quality, value the company's essence and intrinsic value more, and set their sights farther ahead, thus leaving aside all kinds of noise in the market.

Of course, if you can stick with it for a long time, you will undoubtedly be a long-term winner in the company's development. The temperament of a shareholder or boss is not natural or natural. Tell me a little story.

More than 10 years ago, I worked for a group company, and the shareholders arranged for my cousin to exercise in the author's department. He was particularly fond of playing mahjong during this period. As a result, he was always listless and even slept the next day at work.

I once had a serious conversation with him. He said that he had just spent too much time. His father had already arranged for him to manage a small family factory, so this wouldn't be the case if he became his own boss. About a year after he left, when I heard my colleague talk about him again, the factory had already closed because of playing cards, and he was kicked out of the house.

5. Humble and studious

Humility allows us to make the most conservative decisions within our circle of ability. Mark Twain once said that what gets us into trouble is not ignorance, but belief in known myths. Humility means being in awe of the world. In a sense, the development of the world is determined by aspects we don't know. Technology has advanced to the present day, and the world we see is only 5% of the entire world. This is compared to 1000 years ago, when humans didn't know about the air, did not know about electric fields or magnetic fields, and didn't know the elements. Compared to the Tianyuan region, our unknown world is much larger and unimaginable.

We often say failure is the mother of success, because failure has taught us more about the world. There is another sentence we must keep in mind: “Success is the mother of failure”. Confident humans often like to use their inherent knowledge and experience to judge the world and seek swords.

The more success people experience, the more they attribute it to their ability and ignore the element of luck. This makes them overconfident, and excessive confidence often leads to brain expansion, arrogance, and disdain for the market, the world, and even knowledge and common sense. Of course, it is inevitable that failure and loss will follow. I remember that in a sharing, Feng Liu also specifically warned investors that the least lacking in this market is intelligence. Personal strength is insignificant in the face of a huge complex system. Abandon wisdom, be humble, and face it with common sense, faith, and luck.

In order to adapt to the development of the times and technology, we need to maintain awe of the market, maintain awe of the universe, and urge continuous self-learning to better understand ourselves and the world.

Successful investments mostly take place within one's circle of competence. Buffett told us through 50 years of practice that investors can truly establish their own circle of competence through long-term unremitting efforts. The core of Buffett's “hard work” is learning. Mr. Li Lu, Munger's business partner, once said that what really drives the compound growth in return on investment is the increase in investors' knowledge and thinking ability.

Every successful investor pursues lifelong learning. They read a lot in their daily lives and keep thinking about the future. Buffett, who is nearly 90 years old, wakes up on time every day and spends a lot of time reading all kinds of news, financial reports, and books. His office had no computer, no smartphone, just books on the bookshelf behind him and newspapers spread out on a table. Reading made Buffett's life and fortune. His partner Charlie Munger once commented: Of the smart people I've met in my life from all walks of life, there isn't one that doesn't read every day—none, none.

You may be surprised that Warren reads a lot; he is a bookshelf with two legs long. And Munger is also an example of a love for learning. Mr. Li Lu has met Munger many times. Mr. Munger always reads newspapers until the time of the interview. Masters of reverse investing always take research reports with them when they go out to read during a flight or when a plane is delayed.

When I was chatting with a leader the day before yesterday, he asked me what the biggest pressure at work is right now; I said it's studying. The unknown world is too big, and science is progressing every day. If you don't study or research, you will encounter the dilemma of blind people touching images. Especially when I first started investing in the primary market, many projects looked beautiful. I thought the project was beautiful because I didn't know the industry it was in at first. We only discovered after in-depth research that the technology owned by the project was already mature in its industry, but it was not popular in China at the time.

Investors need to be studious, but not curious. Being curious is important, but if you only have curiosity, it's easy to walk around and see flowers, get fat and lose weight; if you don't focus, you won't be able to complete the accumulation of knowledge; seeing isn't necessarily true; if you can't see the essence, it's easy to be paralyzed and deceived by appearances. The academic requirements for investment are broadly as follows:

(1) Focus, focus, and learn through.

I'd rather drill one well than dig ten pits. Investors need to do continuous learning and observation in fields they are familiar with or interested in, understand technology, understand the market, understand trends, and understand logic. The status of an industry expert can help uncover industry trends and develop professional thinking. Mr. Li Lu, the manager of the Munger family's assets, mentioned during the sharing that transactions should not follow suit, nor should research follow suit.

Because everyone's circle of abilities is not the same, he said. Every value investor's portfolio is different. You don't need to communicate much with others. Other people's stocks and opportunities are someone else's business; they have nothing to do with you; you just need to do your own thing well. We also often say that having a beautiful girlfriend is someone else's business; it has nothing to do with you. I'd rather dig a well than ten pits. If you follow the trend and watch other people's research and have fun yourself, you will fall into a cycle of constantly digging pits, constantly digging pits in new places, and it will be difficult for you to dig up water.

Li Lu further mentioned that it usually takes many years to really understand an industry and figure out a company. However, the benefit of “continuous refinement research” is that knowledge will continue to be accumulated and surpassed. When knowledge and investment grow at the same time, you will experience the happiness of knowledge logic confirmation. At the same time, this kind of positive circular feedback also allows knowledge to generate cumulative compound interest growth. So he said that the longer it takes to invest in this way, the better the results will be.

(2) Multi-channel, all-round, systematic learning and thinking.

This includes learning from practice, learning from the market, learning from life, and learning from upstream and downstream supply and demand sides as much as possible in an industry. In everyday practice, observing the industry in multiple dimensions is a good way to learn. For example, there will be many upstream and downstream chains in an industry. When the industry climate changes, what kind of reaction will the upstream and downstream have, and which link will react first? What kind of reaction will industry friends and merchants have? After making this deduction in writing, it is possible to search for data, visit and observe to confirm it in practice.

For example, when we previously observed the overseas market of Longji Co., Ltd., a leader in the photovoltaic industry, we specifically visited another leading overseas module company. During the visit, we heard the same logic: North America and Europe are replacing decommissioned thermal power with photovoltaics, which strengthens our confidence in continuing to hold Longji. In the field of auto parts, Fuyao Glass's upstream and downstream integration played a critical role in the company's cost control. When Apple supplier Lixun Precision was also making similar vertical integration actions, we instantly understood why the company continued to obtain a high ROE.

(3) Correct learning, filtered and critical learning.

The correlation between daily updated economic data and the business and share price of a particular company is difficult to explain. Macro data shows the past, but what stock prices react to is the future. Using macro information from the past to guide the future of micro companies is likely to reach a dead end. Recently, when reflecting on brokers' strategy analysis, Chen Li, an analyst at Dongwu Securities, pointed out that general research has made the entire strategic analysis pointless, and they have found a target that no one sees at all to attack desperately. Instead, focus on industry and company learning and research.

At the same time, we open trading and financial software every day, and a lot of the information that pops out is purposeful and biased. Today, when information tools are so developed, investors won't miss out on important information as long as they focus a little bit. The key is how we identify the really important and essential information. At this time, investors need a spam detector and filter to sort and delete spam and misinformation. All in all, we need to learn the right things.

(4) Use grid thinking to think and learn interactively.

In order for everyone to learn properly, Munger emphasized that investors should have a “grid mentality” and multi-disciplinary thinking. This does not mean that everyone should be experts in multiple subjects, but rather that they must have a way of thinking and important theoretical ideas in multiple subjects. He said that “for people with a hammer, the whole world is a nail.” “For people with a hammer, the whole world is a nail.” “Linking the mindset of different disciplines to establish an integrated grid is the best decision-making model. It can also be understood that if you think about the same investment problem using different disciplinary ways of thinking, and if you can draw the same conclusion, this kind of investment decision is more correct.”

In the world of technology, such as in the field of electric vehicles, there are N types of battery solutions, including hydrogen fuel. Any technology path seems likely to continue to advance and reduce costs. Who will eventually be the choice? Market disputes can cause investors to worry, get tangled, and hesitant. However, after studying the consumer demand theory, we will find that the first thing the market looks at is not cost, but safety.

In the field of electric commercial vehicles, since users use vehicles as production tools, investment cost efficiency has become a top priority. After visiting new generation electric commercial vehicle teams, we found that technology alone is difficult to meet the needs of individual transport drivers without the support of traditional financial means. What I want to say is that many times many questions aren't problems in themselves; there's no use in getting tangled up; you have to think outside the box, think interactively, and think from the user's perspective or use Musk's first principles.

In the “Three Body” world, the philosopher in the ant world and the philosopher in the turkey world seem very powerful, but they are also so ridiculous in the eyes of humans. But in the universe, would the so-called great discoveries and summaries of human discoveries make the gods of the universe laugh? The answer is definitely. To avoid being narrow-minded and mentally retarded, it is recommended that investors often meditate, imagine themselves from God's perspective, scan in all directions, travel 10 or 20 years forward, and then look back and see how the competitive landscape will evolve and the times will change.

In addition to the above, it is also important to be optimistic and know how to face failure, but this article doesn't emphasize it separately, mainly because there are too many optimistic people, and those who fail the most are overconfident and overly optimistic. How to face failure also requires rationality as a foundation; otherwise, you will fall into a situation of victory for the self-defensive Arab spirit.

Real successful investors are not only because of their ability, but also because of their unique temperament. Fortunately, “patience, calm, rationality, shareholder awareness, humility and learning” are not born; they can all be formed through acquired training, so you and I all have the opportunity to develop through learning and training. We call this process self-healing. In the past, we have always emphasized that investment is the realization of cognition and emphasis on ability. The purpose of this article is to suggest that while continuing to improve and continuously learn “knowledge,” we also need to cultivate our own personality traits.

Editor/jayden