Psychology of Poor Investors

“The secret has been out for 50 years, ever since Ben Graham and Dave Dodd wrote Security Analysis, yet I have seen no trend toward value investing in the 35 years that I’ve practiced it.” – Warren Buffett, 1984

The quote above was said in the 80s by Warren Buffett, the master of value investing. He has amassed an annual return of around 25% for the past years. Doing this consistently is certainly no luck but pure skill. Not many have caught on to the value investing bandwagon just like what Buffett realised in 1984. There are couple of reasons for this:

Lack of Patience

An undervalued but fundamentally strong stock might take years to reach its true value. Many desire only for a quick profit.  Thus, they lack the patience to hold the stock till its value is reached. They can’t bear to see their stock staying at around the same range for months. They want instant movement of their stock once they press the “Buy” button. By lacking patience, they cannot have time working for them and compounding the growth.

Lack of Discipline

To profit  as a value investor, discipline is paramount. Lacking discipline to average down the price of the stock when a fundamentally strong stock goes down in price is not a trait of a value investor. Lacking discipline to hold a stock till intrinsic value is reached is also not a trait of a value investor.

Fear

Many fear when the markets are going down. Warren Buffett has said one should be fearful when others are greedy and greedy when others are fearful. When others are fearful and start selling huge chunks of a good company’s shares, value investors scoop them up like what shoppers do when they see a sale item. This was evident during the financial crisis back in 2008. When the markets recovered, those who bought at the lows certainly made lots of moolah. One has to conquer the fear of a plunging market and be ready with capital to plunge into the market when things look moody. But be careful not to catch a falling knife! Exercise prudence.

Greed

Fear and greed are interconnected. When fear strikes, people shun the stock markets. When greed strikes, people horde the stock markets like there’s no tomorrow. Buying when things are euphoric means one has to pay a price higher than the value of the stock. People buy when things are euphoric as they are afraid of missing out of the rising stock prises. This is when value investors sell and cash out when the stock has reached its intrinsic value. Value investors tend to buy when the market is fearful (during a major crisis or major negative news) and sell when the market is getting overbought and the P/E of the market is at 50 (when the normal “investors” are buying)! When the markets are down, there’s always a piece of news to support it. Likewise, when the markets are rising, there’s always news to support it also. One has to practice critical analysis and filter out unwanted news.

Laziness

Learning about value investing takes time and patience. There are lots to learn and one can never stop learning about value investing. The market is dynamic and everyday new learning opportunities are provided. Since people can be lazy to acquire knowledge, some rely on tips from friends, stock brokers, etc and get their fingers burnt unnecessarily. Thus, learn about value investing from books, internet and courses and this knowledge will stay with you, waiting to be unleashed and benefited from.

In conclusion, it can be seen that most of the reasons are all psychological. If we conquer the fear and the likes, one can do value investing with a peace of mind and compound the growth and achieve the goals set out.