Business acumen and diligent research are qualities of good investors, but long-term success requires certain characteristics that reach beyond hard work and intelligence.
Here are Clarkston Capital’s Five Principles of Investment Success:
Sound Philosophy: Investment success begins with a sound philosophy that governs all investment decisions. Philosophies should be simple, grounded, and built around the strengths of the investor and/or firm.
Discipline: Successful investing is dependent upon strict discipline to the investment philosophy:
- Purchase companies that meet all requirements outlined in the investment philosophy, while also having a clear and comprehensible set of pertinent fundamental metrics.
- Calculate business value, and only buy when the market price is at a level that provides a reasonable risk-adjusted margin of safety.
Courage: The value investor has the courage to be cautious when others are greedy and opportunistic when others are fearful. Having courage is paramount to staying true to principles, particularly at times when trends are going the other direction. Decisions will often be questioned, but when the analysis is diligent and the work is sound, courage gives confidence, and clients share in that conviction.
Patience: When it comes to investing wisely, patience is a virtue. The process starts by studying a company to determine its business value, then waiting until the market price reaches a discount deep enough to warrant a purchase. All this waiting requires patience. Investors who lack it will make two vital mistakes: buy high and sell low.
Concentration: Over-diversification is problematic for two reasons: First, it is difficult to follow and understand many companies; second, small positions have little effect on the overall performance of the portfolio. Concentration enables the investor to spend more time on individual companies, and allows each company to have a significant contribution to the overall performance of the portfolio.