Chapter Eighteen
The World Belongs to Optimists
Golden Investment Attributes and Rules
In emerging markets investment, I believe it is necessary to be optimistic. The fact remains that there have always been problems and there will continue to be so in the coming years throughout the world. But we are entering an era that is perhaps unparalleled in the history of mankind. With higher income and living standards, better communications and technology, improved travel, greater international trade, and generally better relations between nations, emerging markets investors have the perfect opportunity to capitalize on the benefits.
Studies have shown that stock market investments made in a patient and consistent manner will invariably grow, since there is a natural tendency for the value of equity investments to rise in order to keep up with inflation. In addition, independently managed businesses, competing successfully in the marketplace, are generally winners in the stock markets as there is a tendency for their sales, profits, and assets to expand. However, it is not always possible to predict whether a company is going to be successful or unsuccessful, so it is necessary to diversify.
“The world belongs to optimists. The pessimists are only spectators.”
—François Guizot
While one can certainly learn numerous technical skills that help in making investments or managing a portfolio, a large percentage of investing is still psychological. Both buyers and sellers act on a combination of instinct, information, and logic. The development of certain personal characteristics could play a key role in contributing to your investment success.
Here are a few key personal attributes that can make for good investment results. These include: discipline, hard work, humility, common sense, creativity, independence, and flexibility.
Someone asked me once if I could condense into five words the most important qualities needed for a good investor, and I replied: “Motivation, humility, hard work, discipline.” It stands to reason that the more time and effort that are put into researching investments, the more knowledge that will be gained and wiser decisions made.
Humility is needed so you are able and willing to ask questions. If you think you know all the answers, you probably don’t even know the questions. As Sir John Templeton once said, “If we become increasingly humble about how little we know, we may be more eager to search.”
To me, common sense is most important when making investment decisions, since the words common sense imply the clarity and simplification required to successfully integrate all the complex information with which investors are faced.
I think a significant amount of creativity is required for successful investing, since it is necessary to use a multifaceted approach in looking at investments, considering all the variables that could negatively or positively affect an investment. Also, creative thinking is required to look forward to the future and try to forecast the outcome of current business plans.
A number of successful investors have commented on the importance of independent and individual decision making. Sir John Templeton said, “If you buy the same securities as other people, you’ll get the same results as other people.” It is impossible to produce superior results unless one does something different from the majority.
It is important for investors to be flexible and not permanently adopt a particular type of asset. I think the best approach is to migrate from the popular to the unpopular securities or sectors. Flexibility is also an attribute that keeps one from holding on to a stock out of loyalty—flexibility allows one to change as times change and as new opportunities present themselves.
So that’s the personal preparation that goes into investing. On the professional side, it can’t be stressed enough that in addition to meeting company managements and their competitors, it is important to be a voracious reader. A wide variety of reading contributes enormously to an investor’s ability to make insightful decisions. Reading is like your body’s muscles; use it or lose it. If you don’t exercise regularly you will lose muscle tone and bone strength. If you don’t read you will not be able to absorb new information and techniques.
Of course, there are also investment attitudes that will benefit your investment results. I’m going to use this space to list what I consider to be some of the most important investment rules I’ve picked up over the years.
Always Diversify Your Investments
Diversification is your best strategy to plan against unexpected events such as earthquakes, political upheaval, floods, investor panic, and the like—not only within a particular market, but also across markets globally. You never want to be overly dependent on the fate of any one stock or security, particularly if you don’t have control over a company’s management or events. Some successful investors with a limited number of holdings believe in the Mark Twain school of thought: “Put all your eggs in one basket—and watch that basket!” But these investors often have some influence on companies and management. Most investors are not able to do that, and if you fall into the latter category, you will always be better off diversifying across countries and companies. Global investing is always superior to investing in only your home market or one market. If you search worldwide, you will find more bargains and better bargains than by studying only one nation.
Without risk, I believe it is difficult for your portfolio to aim to achieve superior investment returns. But that risk taking is not the same as playing roulette or skydiving. The assumption of risk I’m talking about must be carefully planned and researched. Investment decisions always require decisions based on insufficient information. There is never enough time to learn all there is to know about an investment, as equity investments are undergoing continuous change. There comes a time when a decision must be made and a risk acquired. The ability to take just the right amount of risk based on the most diligently researched available information, in my mind, is the mark of a good investor.
Take a long-term view even if you desire short-term rewards. If you take a long-term view of the world and the markets, you are likely to (1) be less emotional and thus less likely to make costly mistakes; (2) see beyond the short-term volatility of the market; and (3) take a step back to see broader patterns of market, political, and economic behavior that may not be evident to a short-term observer. By looking at the long-term growth and prospects of companies and countries, particularly those stocks that are out of favor or unpopular, you will have a much greater chance of obtaining superior returns.
Markets are volatile, like a combustible material. You can warm up gasoline until a certain point, after which it ignites and explodes. But these market explosions give us an opportunity to buy low and sell high, as long as you have been wearing protective gear (such as diversification). The extreme sensitivity of markets to any news, what I call their “manic-depressive” nature, means that they often rise and fall by much more than they should. Remember that the time of maximum pessimism is the best time to buy and the point of maximum optimism is the best time to sell. If you can look beyond the emotional roller coaster of the volatility and use it to your advantage, you might be able do rather well on your investments.
Okay, you win some, you lose some—you can’t avoid it. It’s not only the name of the game, but the only game in town for emerging markets investors. However, some losses are not only avoidable but meaningful, because you learn lessons from them.
With just about every major loss we’ve incurred, we’ve picked up a few pointers. I try to avoid repeating the same mistakes again and again. Because, like most people, I hate being wrong too often, and I know that fund managers are only as good as their last performance.
We’ve had our fair share of losses, believe me. But at the end of the day, we must be ready to make mistakes; otherwise we would never learn. You might even say that hitting a few foul balls goes with the territory.
Even today, when the worst wounds have healed, the mere mention of some losers fills me with dread and regret, but, curiously, not anger—because any hard feelings are softened by the fact that we invariably learn from the experience.
As someone who’s been punched by the markets more than once, I have some advice: Roll with the punches. If you’re going to take real risks, you can’t always count on rewards.
Roll with the punches. If you’re going to take real risks, you can’t always count on rewards.
If you follow the contrarian path, you’re going to find yourself buying stock in distressed companies. You can’t avoid it, because the vast majority of the bargains out there are in shares of organizations that have made a few mistakes along the way. That’s why these stocks are so cheap. That’s why a whole lot of smart people think they’re headed nowhere in a hurry.
Our job is to prove them wrong. So how can we be so arrogant? Because we have the luxury, and the opportunity, of shifting our focus to a five-year time horizon. We can look ahead to a point out there in the distance where the long-term outlook may be more positive than the outlook in the short term. We also have the advantage of stacking the company up against other, similar companies elsewhere, often faced with similar challenges. Sometimes we can see an opportunity and some light where others see only darkness. And, of course, sometimes we’re wrong.
We like finding good companies, and good countries, that have fallen on hard times, but only—we hope—temporarily; companies, and countries, poised to stage an unlikely comeback; companies, and countries, fighting an uphill battle to thrive, even to survive—because only when the odds are against you are you going to find any real bargains.
Those are your big winners. More often than not, the line separating the winners from the losers can be embarrassingly thin.
It’s also important to recognize that not only is nobody perfect, but mistakes are an integral part of investing. You’re never going to always pick winners, and picking losers—in my opinion—should in no way reflect any lack of care or negligence in the selection of investments for a portfolio under management.
These marvelous markets, as they continue to evolve and develop, may be volatile at times. But I sincerely hope that after reading this book, you’ll no longer view volatility only in negative terms. Volatility can be a good thing for investors; be prepared to benefit from it. Market ups and downs, even the most violent ones, provide incentives for people to adapt to new environments and to shifting realities. Free markets can be harsh taskmasters, but to paraphrase what Winston Churchill once said of democracy, the free market may be a lousy system, but it just happens to be the best one we’ve got.