Investing is both an art and a science. This fundamental truth has been reiterated time and time again by some of the world’s most successful investors. Ironically however, many choose to ignore the art side of it, choosing to solely rely on quantitative models rather than the qualitative aspects that make a company great, and the emotions that might drive a stock further up. Few people understand this premise more than Arnold Van Den Berg.
Emotions Drive the Market, not Fundamentals
Arnold founded Century Management in 1974, after he found that value investors that applied the teachings of Benjamin Graham protected their capital better than others during a recession. Despite a strong appreciation for company fundamentals, Arnold is the first to accept what so many of us know, but often choose to ignore – emotions are what drive the market, not necessarily fundamentals.
The concept of emotions running the markets is rooted in the history of value investing. Ever since Graham’s adage to Mr. Market in The Intelligent Investor, it has been clear that panic, euphoria, and apathy are what cause upswing and downswings. We see this even today, as panic can cause worldwide selloffs, and popularity of an electric vehicle company can cause its price to nearly triple in two months, despite poor fundamentals.
Applying Emotion to Fundamentals
“Invest at the point of maximum pessimism” ~ John Templeton
Even though emotions can make our careful stock picking seem like a pointless cause, one of the key points that Arnold emphasizes is how we can use these fluctuations to improve our decision making. I point to the above quote as one of his main philosophies. If the fundamentals of a company are solid, they will stand true in the long run. What we must be wary of are the huge fluctuations in the near term as a result of exuberant optimism and pessimism, however these can be used to our advantage. If we invest with a long-term mindset and invest in good companies when Mr. Market is feeling especially run down, we will reap the gains of both our quality fundamentals, as well as those from Mr. Market’s positive mood swing.
Investing and Life Principles
Through his life, three principals have guided Arnold’s journey through both life and investing. Those being always tell the truth, be cautious of anger, and do not feed your ego. “Nothing could be more destructive to a person,” Arnold says, referring to a combination of these three. However, these are not solely detrimental to our personal lives. Ego can cause us to become overconfident and lose the healthy skepticism required to be a good investor. Likewise, anger can cause us to act irrationally and not make good, fundamental decisions. Finally, lying leads us down a spiral where we tend to no longer seek out the truth, which is something required in the due diligence of investing. If there was one piece of advice Arnold could offer anyone, whether it be in life, or investing, I believe it would be to abide by these principles, always.
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Luke Hodge
Luke is an Honors Business Administration candidate, who studied Economics at King’s University College prior to coming to Ivey. During his time there, he developed a passion for investing, and through studying the work of great investors like Warren Buffet and Christopher Browne, a keen interest in value investing specifically. The thing that excites him the most about coming to Ivey is having the opportunity to study the value investing curriculum taught here. Email Luke
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The views expressed in these blog posts are the opinions of their authors, and do not necessarily reflect those of the Centre. The intention of this blog is provide a platform for current, past and upcoming HBA, MBA and Executive program value investing students to discuss value investing and related topics.
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