How different are value investors from other investors?
By George Athanassakos
While the technical aspects of value investing – screening for and valuing low price-to-earnings ratio (P/E) or price-to-book ratio (P/B) stocks – are well understood and documented, there has been no attempt to understand the role that an investor’s individual character plays in investing success even though anecdotal evidence does point to the importance of character and temperament.
For example, James Montier, an investing strategist and member of the asset allocation team at investment firm GMO, believes that successful value investors are contrarian, patient, disciplined, unconstrained and skeptical. And famed value investor Warren Buffett has frequently indicated that his successor must have the right temperament and a keen understanding of human psychology and institutional biases.
But do not all successful investors share similar traits? And if so, then how do value investors really differ from other investors who follow different investing styles?
I wanted to develop a less anecdotal and more formal and systematic understanding of what character strengths and virtues value investors embody.
A few years ago, I conducted in-depth interviews with 19 successful value investors in Canada and the United States and found overwhelming support for the importance of character in value investing. One of the questions asked was “How different are value investors from other investors?”
Interviewees felt that value investors tend to be low-key, not necessarily anti-social, but certainly asocial; they are contrarian, patient and disciplined and willing to do things out of the ordinary. Humility, integrity and independence are also important to value investors. Also interviewees felt that genetics play a big role, as well as family upbringing. But they also felt that character has to be honed in the right environment. It is difficult to teach the behaviour, as it is not an attribute of your IQ. It is more a frame of mind in making decisions. If one has the right frame of mind, everything falls into place. And so interviewees felt that value investing is closer to being a profession whereas running a money-management firm is a business.
In a more recent research project, I wanted to go further, particularly on the question of the differences between value investors and others. And I wanted to directly compare value investors against others as opposed to just talking to value investors and assuming what they are telling me is different from what others may have told me.
I examined two groups of investors. One consisted of the attendees at the Ben Graham Centre’s 2017 value-investing conference. Attendees at the conference paid a good amount of money to attend and listen to outstanding professional value investors talk about their philosophy and how they put it into practice. One has to assume that this group of people was mostly value investors. The other group I approached was through a company that runs surveys for a fee. I asked them to survey people who work in the financial sector and who own personal trading accounts. As value investors tend to be a small percentage of the population, according to Mr. Buffett, I assumed that this group of surveyed professionals was mostly non-value investors.
To keep the survey short, I used an abbreviated questionnaire of personality which focuses on the belief that (a) there are five basic dimensions of personality, often referred to as the “Big 5” personality traits, and (b) that personality characteristics that are important in peoples’ lives will eventually become a part of their narrative. The five broad personality traits described by the “Big 5” theory are: (a) extraversion (for example, outgoing/energetic versus solitary/reserved), (b) agreeableness (friendly/compassionate versus challenging/detached), (c) openness to experience (inventive/curious versus consistent/cautious), (d) conscientiousness (efficient/organized versus easy-going/careless), and (e) neuroticism (sensitive/nervous versus secure/confident).
What I found was that in general and, on average, the responses from the two groups were similar in the sense that there were no statistical differences in the average answers to most of the questions. One area with some difference was that value investors tended to be more conscientious than others.
However, in my opinion, the most interesting finding was the magnitude of dispersion in the answers. Value-investor answers were grouped within a very narrow range, whereas those of the other group spread out more. That is, value investors tended to have a greater similarity of beliefs than the other group. And this is consistent with what Mr. Buffett says in the sense that either you get value investing right away or not, and if not, there is nothing one can tell you to get it. This is also consistent with what I found when I interviewed professional value investors in that value investing is closer to being a profession, whereas running a money-management firm is a business.
Research is continuing. Stay tuned.