September 30, 2020

Striving for Balance in 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 when making investment decisions. However, being too focused or rigid can get in the way of leveraging opportunities. Being so patient that you are stubborn can result in not admitting your mistakes, and the same is true with being over-confident.

There’s a correlation between life and investing—and often, we learn lessons the hard way. From my experience, 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 criteria checklist to guide decision-making. Maintaining this focus is critical. But I’ve learned that it is 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 opportunities that are promising, even if they don’t exactly meet these qualifications.

  • Quality: When I invest in things where the price is attractive, but I overestimate the quality, I sometimes make mistakes. By quality, I am referring to the competitive advantages of the business, the quality of the industry or line of business, and the quality of management.
  • Value: Just because the price is low doesn’t mean it is a good investment. Like many value investors, I’ve had my share of value traps. The only way to avoid value traps is to invest in high quality companies with strong long-term growth prospects.
  • Growth: If you invest in a high-quality company that is growing earnings per share and free cash flow at a strong rate, you may do well even if you buy it at a fair price. You cannot significantly overpay, or you might lose value.

Patience and Stubbornness

I can be too patient and hold on to a stock that is not performing as I expected. For example, I have fallen into value traps that seemed like a “good deal” but weren’t necessarily a good business. We all make mistakes, but successful investors and businesspeople should strive to admit it, acknowledge it and move on.

Sometimes, a stock might take a turn for the worse before it gets better, requiring patience. But there’s a fine line between being patient and stubborn. Stubbornness is waiting too long and holding on to a stock that isn’t performing in terms of quality, value and growth. Doing so can hold you back from opportunities to invest in promising stocks. For example, you can be fully invested in stocks that are not performing because you will not admit they are a mistake. Then, you can miss an opportunity to buy something much better—the sins of omission and commission.

The bottom line: Patience is a virtue; 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.

Confidence and Humility

In investing and life, confidence is important so you can make decisions that align with your values. From an investment perspective, confidence allows you to take calculated risks and to make moves on opportunities. Humility is essential because we are human. We don’t know it all. I humbly recognize that by leveraging the experience, knowledge and skills of others, I will be a more successful investor. Those with humility have a sense of gratitude. I know that I can’t do it alone. But when you are too confident and think you know it all, you are not grateful. You tend to think you can do it all and don’t seek the expertise of others. On the other hand, if you are too humble, you may lack the self-trust to capture opportunities.

Art and Science

There is a science to investing—the technical annual reports rich with data and research. Digging through the pages and analyzing what the numbers mean 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. This is where intuition, life experiences, and instinct come into play—gut instinct. 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 some of the 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 with their practice. Be honest about what you don’t know and enlist investment and industry experts who can share their knowledge and insight to guide sound investment decision-making.

All my best,

Umberto P. Fedeli

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