Valuable characteristics for life and investing
In life, we often talk about the importance of balance. The same is true with investing.
Focus, patience, confidence and humility are valuable characteristics in business, personal relationships and investment decisions. However, being too focused can get in the way of leveraging opportunities. Being so patient that you are stubborn can result in not admitting mistakes. Here are some important yet difficult balances to strive for.
Focus and flexibility
A disciplined process is important in investing, and that includes developing a checklist to guide decision-making. Maintaining this focus is critical, but it’s just as important to be flexible, open-minded and opportunistic.
I try to focus on investing in businesses that have a durable, sustainable, competitive advantage — a three-legged stool of quality, value and growth. However, I also attempt to keep an open mind to promising opportunities, even if they don’t exactly meet these qualifications.
- Quality. When I invest in things where price is attractive but overestimate quality, I sometimes make mistakes. Quality refers to the competitive advantages of the business, and the quality of the industry and management.
- Value. Just because the price is low doesn’t mean it’s a good investment. I’ve had my share of value traps. The only way to avoid them is to invest in high-quality companies with strong long-term growth prospects.
- Growth. If you invest in a high-quality company with growing earnings per share and free cash flow at a strong rate, you may do well even paying a fair price.
Patience and stubbornness
I can be too patient and hold on to a stock that is not performing as I expected. Successful investors and businesspeople admit mistakes and move on.
A stock might take a turn for the worse before it gets better, requiring patience. But there’s a fine line between patience and stubbornness. Stubbornness is holding on to a stock that isn’t performing, holding you back from opportunities to buy something better.
But being too patient can cause you to compromise your values. And, if you are stubborn, you could be viewing things as the way you want them to be, rather than the way they really are.
Art and science
There is a science to investing in the technical annual reports rich with data and research. Analyzing the numbers can reveal hidden assets or potential liabilities. It takes a thoughtful, experienced investing professional to delve into the data and provide strategic investment direction.
There is also an art to investing, where intuition, life experiences and instinct come into play. It’s the heart part, and the side I find most intriguing.
Ideally, there is a balance between making decisions based on analytics and instinct. When we only look at the quantitative factors to select investments, we might overlook qualitative factors like culture or human behavior that can significantly influence stock value. If we only make decisions based on instinct, our emotions can lead us to buy or sell when it’s not advantageous.
Even the best investors have strengths and weaknesses. Be honest about what you don’t know and enlist investment and industry experts who can share their knowledge to guide sound investment decision-making.
Umberto P. Fedeli is CEO of The Fedeli Group