How To Become a Value Investor?

I received a question via email that writes:

Hi, I am perusing a life of a value investor. But my knowledge is little to say the least. May I please ask for guidance for I ardently desire to become a value investor. Thank you and more power to you.

The question is a hard one, as there are no schools that will give you a diploma to legitimately say that you are a value investor. Unlike doctors or engineers that have bar exams… So the term “value investor” to call yourself invites confusion. And I must say, in my early years, I keep telling myself, “Am I doing what value investors suppose to do?”. And since a lot of people call themselves that, even traders, there’s a lot of confusion for the young padawan.

But how do you actually become a value investor?

Practice is one. But how do you practice something that only gives you few opportune times to actually practice and test yourself? Not many. When I started investing, practicing value investing is very good, because I was in a market where it is down. The best time value investors shine. And the best time where you will learn. You see, value investing is like practicing a virtue, say “courage”. How do you practice courage? Well, when you find yourself in a fearful situation then you need to become courageous. But that’s hard, the practice opportunity is also a test. And not many times in your life you will be faced with a situation like that. Once you fail that test, it will become harder for you to practice the next opportunity that comes.

Value investing is the same. How do you practice value investing if you’re only buying safe, big companies that have all the good things going for them? How can you practice something that everybody else also knows are good investments? How can you practice in a bull market? Not very much. What you can do is read. And read a lot. Hopefully get to know those nuggets of wisdom that would take you a couple of market crashes to learn in a book, from other’s experiences.

I’m going to say this now, being a value investor is perhaps born and not made. You have to learn the analysis, that’s the easy part. But accountants know how to look at financial statements but rarely do they become value investors. But what value investors are, I think, are a combination of traits that makes them fit to become a value investor. If you don’t have these traits, you better find a way to get them.

1. Delayed gratification – are you willing to wait for years? Do you enjoy watching paint dry or grass grow?
2. Courage – can you hold on to an investment even if it goes down? Can you catch falling knives? What if the whole world told you, you’re wrong?
3. Independent Thinker – do you look for other’s opinion before you buy a stock? Or do you make your own decisions? How would you know if you’re right? How would you know if you’re wrong?
4. Insatiable Thirst for Knowledge – do you read books even if they’re not related to investing? Are you curious about how things work, no matter what that is?
5. Patience – people will criticize you for your decisions.

I may have forgotten some, but those are what I think are the traits that makes a value investor. So, if you have those, plus the analysis part, then you are a value investor and start calling yourself that. If you don’t have those traits, perhaps its time to learn how to acquire them.