With The Value Perspective team blessed with a number of new and impending arrivals – at home rather than at work – we have found ourselves reflecting on similarities between good parenting and good investing.
You may well have some thoughts of your own – and please do let us know – but here are five things we reckon the two disciplines have in common.
The importance of patience
I am sitting with my daughter as she reads through her book and she sees a word she does not recognise.
She spells it out – “P-A-R-T-Y” – and in due course settles on “Party”.
It is an experience every parent will recognise – and presumably, like me, you choose not to point out that that word was on the previous page and the page before that and in the title of the book …
When you are a parent, you just have to be very patient – and the same holds true in investing.
The more patient you are as an investor, the more you allow the surprisingly powerful forces of compounding – the interest or growth earned not only on a loan or investment but also on the interest or growth previously earned – to do their thing.
The importance of questions
Why is the sky blue? How do toilets work? Do caterpillars have noses?
Children have a knack of asking questions that, while apparently simple, can starkly reveal their parents’ lack of knowledge of the world.
Equally, while investment can seem very complex, it is often the most simple questions that get to the heart of what you need to know.
For value investors, the simple question we always have to ask is ‘Are we paying the right price for this share?’.
No matter how good the story surrounding a business might be, if you pay the wrong price, then you are in trouble right from the start.
As we have argued before, in articles such as All in the price, what you pay, not the growth you see, is the biggest driver of future returns.
On a similar note, at some point in their life, every child’s favourite question is ‘Why?’ and this is something investors also need to be asking on a regular basis.
Car giant Toyota came up with the ‘5 Whys’ technique to help drill to the heart of a problem that could have multiple causes and asking ‘Why?’ multiple times – not least, why a company is trading at the price it is – should be every investor’s favourite question too.
The importance of staying in control of your emotions
This experience may also ring a bell.
You have had a long day at work and now you have been left in sole charge of the children for the evening – and they are not doing anything you say.
They are not getting into the bath, they are not getting out of the bath, they are definitely not brushing their teeth and the possibility they should head to bed has not even entered their minds …
No matter how frustrated and stressed you become, however, you know the worst thing you can do is explode.
And, as we have argued in articles such as World Cup emotions, emotions and investing do not work well together.
Markets are cheap when people are fearful and they are expensive when people are greedy – and value is an objective system that can help exploit that simple fact of investment life.
The importance of understanding mistakes are inevitable
Parents may instinctively want to keep their children from making mistakes but, of course, mistakes are not only inevitable, they are also part of the learning process.
Mistakes are inevitable in investment too – nobody in the history of making money has had a 100% success rate – and, again, it is how you react and what you learn that matters.
In investment, sticking to a process that works is more important than individual outcomes.
The importance of perseverance
Anytime we have homework in our house, we know it is always going to be a battle to ensure it is finished – but we also know that battle is worth having.
And it is worth having every single time because there is something positive that comes out of it in the long term – teaching your children the importance of doing the work and working hard.
That perseverance is also crucial in investment – once you make a decision, based on your process, you have to stick with it, no matter how hard it might seem.
This chimes with our earlier point about patience as you do need time working for you.
Value investors buy things cheaply to give themselves a ‘margin of safety’ as they know from experience the strategy does not work to a schedule or perfectly or indeed all the time.
Like good parenting, though, over the long term and on average, it does pay off.