7 Traits for Investing Greatness:
#4 Patience & Persistence
#5 P.M.A.

Categories Author: Jim O'Shaughnessy, Investing

What does it take to be an Active investor? It’s a lot harder than it looks. Following up on the first and second part of this article, let’s examine Traits #4 and #5 (of 7 total) that I believe every long-term Active investor needs for success:

#4 — Restless & Relenting?

Successful Active Investors are Patient & Persistent.

“Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with great talent. Genius will not: unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent.”

— Calvin Coolidge

In addition to having a well thought out process (see Part 2 of this article), great Active investors are patient and persistent. Warren Buffett, Ben Graham, Peter Lynch, John Neff, and Joel Greenblatt are all great investors who’ve passed the test of time despite intense scrutiny and criticism. While each of them have very different ways of looking at the stock market, they all share a common disposition: they are patient and persistent.

As an example, in 1999, numerous articles and TV features suggested that — while he might have been great in the old economy — Buffett was well past his prime and was out of step with the “new” market reality. Buffett’s response? He noted that nothing had changed on his end of things and that he would stand pat with the process that had served him so well for so long.

The same could be said for every investor on the list. John Neff, a great value investor who helmed Vanguard’s Windsor fund and beat the S&P 500 by 3.1% per year over his 31-year tenure. In the early Nineties, I remember the cover of Institutional Investor magazine showing a man inside an hourglass where the sand had nearly emptied from the top, along with the question: “Is value investing dead?” Neff, who favored stocks with low P/E ratios, high dividend yields, and good return on equity (and who had therefore had been underperforming over the short term!), did the same as Buffett. Neff patiently stuck with his process focusing on cheap stocks with strong yields and high ROE. He went on to deliver great returns for his investors.

The point is clear: successful Active investors are not simply defined by their process (since many have very different approaches and processes that they follow). Rather, it’s their diligence and persistence in sticking with their strategies even when they are underperforming their benchmarks. As well, all these investors are also defined by the clarity of their process.

John P. Reese and Jack M. Forehand wrote a book called The Guru Investor: How To Beat The Market Using History’s Best Investment Strategies,1 in which they methodically create checklists that investors can follow to emulate their favorite Manager. Now, while their interpretation of a manager’s criteria is open to debate, they do a good job of creating checklists for the investors they attempt to duplicate, usually using either books or statements from the manager to generate their criteria. They also maintain a website (validea.com), which details the performance and current stock picks from each of the managers they follow. For example, much like the list of criteria already covered for Buffett, here’s the process they use for emulating Ben Graham:2

  1. No technology companies, company must have high sales
  2. Current ratio of at least 2.0
  3. Long-term debt does not exceed net current assets
  4. Steady EPS growth over the past decade
  5. 3-year average P/E is less than 15
  6. Price-to-book times P/E is less than 22
  7. Continuous dividend payments

According to their website, applying these criteria to select stocks has returned a cumulative gain of 377%, outperforming the market by 248% since 2003! Also at their website, you can see how other managers performed. Note, validea.com subtly anchors you in the long term by presenting the cumulative return over the prior 13 years, thus reinforcing the idea that you should only judge Active performance over very long periods of time.

If you’d only been looking at the recent performance for the “Channeling Ben Graham” strategy, it would have led you to a very different conclusion3 Given the strategy’s dismal 2014 and 2015, do you really think you would’ve had the patience, persistence, and emotional fortitude to stick with it? For the vast majority, the answer is a resounding no. For successful Active investors, the answer is an emphatic yes. Patience and persistence would have paid off in 2016, with a gain of 20% versus a gain of 9.5% for the S&P 500. More importantly, keeping the long-term track record in mind would have immensely helped an Active manager or investor to stay the course.

#5 — The Importance of PMA4

Successful Active Investors Have a Strong Mental Attitude.

“Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude.”

— Thomas Jefferson

Ben Graham believed that great investors are made, not born. It takes constant study, learning from both your own experience and that of others to create habits that lead to success. I believe that one of the habits that is not innate but learned is a strong mental attitude. I think that most successful Active managers not only have strong mental attitudes, but many border on stoicism.5 Stoics taught that emotions resulted in errors of judgment and they thought that the best indication of someone’s philosophy was not what a person said, but how they behaved. In the words of Epictetus,6 “It’s not what happens to you, but how you react that matters.”

Successful Active investors understand, as Napoleon Hill stated, “The only thing you control is your mind.” Practically, this means that you do not base your actions, feelings, emotions, and thoughts on external events — good or bad — or on what other people are doing or saying, none of which are in your control, but rather on your own actions, beliefs, and habits, all of which are in your control.

Successful Active investors do not blame others or events; they do not shirk from their personal responsibility for how things turn out, but rather continually focus on their process and trying to improve it. They learn from every lesson, be it good or bad, and continually strive to incorporate that learning into their process. Above all, they understand that you must control your emotions rather than let them control you.

They understand, as Shakespeare famously wrote, “there is nothing either good or bad, but thinking makes it so.”7 Events very much depend upon how you interpret them. What might cause one person to react emotionally to something is treated as a learning experience by someone with a strong mental attitude. I think that this is a disposition that is learned and rarely innate. It is very helpful on the journey to becoming a successful Active manager to keep a journal of how you reacted to various events and outcomes. This lets you see if there is a common thread that keeps you from succeeding. If so, then you can actively work to replace those behaviors.

By doing so, you reinforce the belief that the only one controlling your mind is you, which strengthens the synaptic connections8 in your brain that allow you to make this type of thinking more natural.9 Once accomplished, your thought patterns and mental attitudes become vastly more useful than reacting from base emotions such as fear, greed, envy, and hope. After habituating yourself, this mindset frees you to persistently follow your process, even when it is not working in the short term. Years before the DJIA was created, Ralph Waldo Emerson proclaimed, “To map out a course of action and follow it to the end requires courage.” And, I would add, a strong mental attitude.

Go to Part 4 (of 4)…

  1. (Feb. 2009) wiley.com/WileyCDA/WileyTitle/productCd-0470377097.html
  2. See Graham/Dodd’s seminal Security Analysis: Sixth Edition (includes a Foreword by Buffett).
  3. In 2014, the strategy lost 22.9% versus a gain of 11.4% for the S&P 500 and in 2015 it also lost 20.4% versus a slight loss of 0.7% for the S&P 500. If you started using the strategy at the start of 2014, your account would show a cumulative loss of 39% at the end of 2015 versus a 10.62% gain for the S&P 500.
  4. In 1937, Napoleon Hill first developed and introduced the Positive Mental Attitude concept in the book Think and Grow Rich. Though Hill doesn’t actually use the phrase verbatim in that book, he develops the importance of positive thinking as a principle to success. (Later, PMA is used verbatim in his book title Success Through a Positive Mental Attitude.)
  5. See Ryan Holiday’s 2016 The Daily Stoic: 366 Meditations on Wisdom, Perseverance, and the Art of Living.
  6. From Wikipedia: “Epictetus (born c. 55 A.D.) taught that philosophy is a way of life and not just a theoretical discipline. To Epictetus, all external events are beyond our control; we should accept calmly and dispassionately whatever happens. However, individuals are responsible for their own actions, which they can examine and control through rigorous self-discipline.”
  7. Hamlet Act 2, Scene 2.
  8. See Norman Doidge, M.D. The Brain That Changes Itself: Stories of Personal Triumph from the Frontiers of Brain Science (2007)
  9. See John B. Arden’s 2010 Rewire Your Brain: Think Your Way to a Better Life