The Five Virtues of aWise Investor

Chris Cordaro

This is a topic I think about a lot: The virtues that can make someone a great investor. I’ll share my list of five important characteristics you may want to cultivate yourself, as well as look for in a wealth manager.

At first glance, it might seem like these virtues aren’t at all connected. However, I sort of think of them like the lessons the magical Mr. Miyagi taught the young Daniel in The Karate Kid. Separately, each investor virtue may sound a bit odd. However, when you put them all together, you’ll clearly see how they intersect.

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The Five Virtues of a Wise Investor

Investor Virtue #1: Curiosity To illustrate the virtue of “curiosity,” consider a psychological experiment University of Wisconsin-Madison and Northwestern University researchers conducted with 100 people and some tempting fortune cookies.

To start, researchers offered participants the choice of a plain fortune cookie or a chocolate-dipped one. As you might expect, most (80%) of the participants chose the chocolate version.

Next, researchers offered a different set of people a choice between the two cookies, but added a twist. They told participants that there was a fortune inside the plain cookie that revealed something the researchers knew about the person. In this case, curiosity trumped chocolate. Almost three-fourths of participants (71%) chose the plain cookie with the intriguing fortune.*

What does this tell us about human nature? Instead of choosing what we think is the obvious best answer (the chocolate-covered cookie), 2

being curious can open our minds to other good choices (the plain cookie with secret information).

Curiosity challenges the status quoCuriosity can also have a big impact on investing choices. Curious folks—both investors and wealth managers—make a point to look carefully at potential financial opportunities. Curious individuals tend to look harder and longer to find good bargains. They also ask more questions, such as “Why is everyone buying that stock?” or “Why is everyone running away from this area of the market?” They usually don’t blindly copy other people’s financial choices.

Curious investors often look outside their comfort zones. They’ll investigate options that might provide great financial opportunities—such as investing globally or in emerging markets.

Questions can lead to a well-diversified portfolioCurious investors tend to consider a larger set of financial options,

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which in turn prompts them to diversify their portfolio, which in turn can help them to take less risk with their money but earn potentially higher returns.

When stretching a little isn’t completely natural to them, investors work with curious wealth managers who can help them broaden their investing perspectives.

Here’s a good self-test to see if you are a curious investor. If you are completely comfortable with every investment in your portfolio, you may not be curious enough. Most people stick close to home or within their comfort zone when it comes to investing. However, being truly curious means expanding your horizons a little.

That’s my take on curiosity as a key virtue of a wise investor. Stay tuned for my list of four more. No hints—I want to keep you curious!

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* By the way, everyone’s fortune said the same thing: “You are not illiterate.” True, but a little bit of a bummer. No psychic insights or revealed secrets after all.

Investor Virtue #2: CourageYou may wonder why there’s an image of a pumpkin patch accompanying

this blog, and what pumpkins could possibly have to do with courage, right? Let me explain.

My RegentAtlantic office window in our Morristown office faces out to a lovely view—especially in the autumn—of Wightman Farms. I often gaze out at the farm when I’m thinking through complex financial questions. In the fall of 2008, at the

height of the last recession, I looked out that window a lot.

What surprised me that season was the sight of so many families visiting the farm to buy large orange vegetables for $50 that they probably would not eat. It was those orange vegetables in the pumpkin patch that gave me immense courage about our country’s financial situation.

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Why? I remembered that despite U.S. financial challenges, the world wasn’t closing for business. Nowhere close to it.

People were still buying pumpkins for Halloween. The pumpkin patch was generating a lot of sales for the farm. Other companies were doing just fine, too. Amazon was still making deliveries. BP was continuing to pump gas. Starbucks was still brewing and selling coffee.

Most businesses continued to function as usual. That was the key reminder. Business was certainly slower than usual. We still needed gas and coffee; we just bought a little less of it than normal.

Investing in stocks can feel a bit scary—especially when the economy isn’t booming. However, investing in businesses seems much less intimidating. In 2008, you might have been squeamish about increasing your investments. However, if you looked at all the action in the pumpkin patch or Starbucks, you might have felt just fine about investing in companies that we all needed in one form or another. The world was still producing and selling jack-o-lanterns, dried corn stalks and liquid caffeine infusions.

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Here’s the point related to the second virtue, though. Every stock in which you invest is just a share of a business. When you look at investments that way, it takes away some of the mystique. In the fall of ’08, I took courage from seeing so many businesses continue to do well. It made no sense to stop investing in businesses, which also meant it didn’t make sense to stop investing in the market as a whole.

As such, I stuck with my discipline of investing in a way that made sense for my own financial situation, and talked with our investment committee about continuing to do the same for our clients.

Signs of a turnaroundJust as the pumpkin patch gave me courage to remain confident in the fall of 2008, my colleagues’ dining habits signaled the end of the market bottom in March 2009.

Every Monday, we typically start the week with a meeting of the firm’s professionals to review investment and planning topics. I remember that on the first Monday in March, I was asking folks what they had

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done the previous weekend. It seemed like everyone had gone out to dinner. That was new. Why? I think we all decreased our entertainment budgets during the crisis. However, that weekend seemed to mark the end of the dreariness we were willing to absorb without a return to normalcy.

Judicious spending is another key to courage. We all can cut back our budgets for a while, but then our spending habits spring back. Big consumer items, like tires and computers, start to wear out and need replacing. Fortunately, recessions are impermanent and if you are courageous they can also be great buying opportunities. There were some good deals on things like car accessories and electronics as the recession eased up.

CourageWhen I look up the definition of courage, it describes “a quality of mind to face difficulty, danger or pain.” Note that it doesn’t say anything about being free of fear. You can be nervous and still have courage, particularly in the financial world. What I think can help give you

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financial courage is having a clear plan. It’s a lot easier to be calm about your portfolio, even during market downturns, when you have a well-defined financial plan that fits your goals and values.

Another way to remain a courageous investor: Don’t panic. You’re not going to make good decisions when you’re panicking about what’s happening to your portfolio. In fact, in a downturn, there are awesome opportunities for calm, courageous investors. Why? Many stocks are essentially “on sale” if you’re brave enough to take advantage of low prices. This is precisely how we invest for our clients. It’s a fundamental piece of our investment strategy.

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Investor Virtue #3: ThriftI talk a lot with clients about the value of being a thrifty investor. By that I mean getting great value for what you buy. However, I find that it’s easy for people to confuse thrift with frugality. In my mind, these are two very different things.

I define frugal as being cheap for cheap’s sake. On the other hand, being thrifty means spending money wisely and ending up with a good product. Take Q-tips®, for example. I’m a thrifty shopper. At the same time, I’ve decided I won’t buy generic, no-frills cotton swabs anymore. They seem to break easily, leaving the plastic stick poking uncomfortably into my skin. I stick with Q-tips* and am happy to stock up when they’re on sale.

Thrifty investors approach the financial market the same way: They expect to be well compensated for the money they’re investing.

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They’re not simply looking for the cheapest possible stocks to fill up their portfolio.

Some stocks are cheap for a reasonLike generic cotton swabs, certain stocks are cheap because they ought to be cheap. There may be something wrong with the underlying company. Thrifty investors avoid those stocks.

Instead, wise investors look for investments that are selling at bargain rates because other investors have overlooked them for some reason. The market has temporarily failed to see the stock’s inherent value. Thrifty investors swoop in and buy these stocks at low prices.

About the value investing strategy“Value investing” is the umbrella term for the overall strategy of buying stocks that are selling at low prices compared to the overall market. We have 90 years of pretty good data to show how well value investing works.**

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Why do stocks sometimes sell at below their true value?It’s natural for stock prices to cycle above and below their true value over time. Sometimes prices will dip to well below true value, but over time, those prices tend to swing back up.

That’s how and why thrifty investors may be able to make money in value investing: We buy stocks low, wait for them to increase in value, then sell them at a higher price. It’s the oldest maxim in the investing guidebook: Buy low, sell high.

By the way, we can always determine a stock’s true value via a number of calculations, including book value relative to price, earnings relative to price, or a combination of computations.

Being a thrifty investor takes disciplineFollowing a value-investing strategy isn’t always easy. You may have to wait through long periods of time when value investing is out of favor. We’re actually in one of those out-of-favor periods right now. Value

investing has underperformed dramatically since about 2010.

What this means: You may be doing a great job of buying undervalued stocks at bargain prices, but it’s going to take a while for the market to show you that your picks are good and reward you with higher prices. So sit tight, keep buying quality stocks (the equivalent of name-brand Q-tips) at good prices, and wait for your eventual payoff.

In other words, have patience. And that, actually, is the focus of my next installment in my series about the five virtues of great investing.

* I’m not being financially compensated to promote Q-tips. They just happen to work well for me.** Source: Dimensional, Fund Advisors for the period 1927 to 2014.

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Investor Virtue #4: PatienceOf the five investing virtues I discuss, patience may be one of the hardest ones for many people to embrace. The bottom line is that investing is never about instant gratification. However, many people wish it were.

Whenever I talk about the importance of being a patient investor, I revisit the famous Marshmallow Experiment. In that famous 1960s-’70s Stanford University study, psychologists tested the ability of young children to delay gratification. In short, preschoolers could immediately eat one marshmallow (or another sweet treat), or wait awhile to earn

two treats.

It turned out that the kids who were patient enough to earn two marshmallows exhibited helpful self-control in many parts of their lives as they became adults.

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Patient investors take the long viewHaving patience as an investor is quite similar to having the ability to wait for two marshmallows. You may have to choose to give up some immediately gratifying things, like owning the hot stock that is supposed to rocket upward in favor of owning good bargains that may take a whole decade to mature. Just ask anyone who lived through the dot.com era of the late ’90s about their experiences.

As I mentioned in my blog about the virtue of thrift, you need patience because most investing strategies take time to pay off.

Here’s a good example from the corporate world. According to a 2008 study by Goyal and Wahal, when large corporations replace their pension fund managers, the fired managers tend to outperform the hired managers on average by 0.95% annually. The study ran eight years (1/1/96-12/31/03) and measured 660 round-trip decisions. Why did the newly hired managers not do as well? Investment strategies take time to produce results.

The pension fund fired managers whose used out-of-favor strategies and replaced them with “hot” managers using in-favor strategies. The corporate execs making the decision were not patient enough to allow the strategies of the fired managers to come back into favor.

To be honest, I’ve made this very mistake myself in my career. On our investment committee, we’re very careful about making sure we’re not making a decision to fire an investment or manager simply because they’re out of favor or to hire a manager or add an investment because it’s “in fashion.” Fashion is fickle—which is not rewarded. Patience is rewarded.

The winners are those who waitWhat this means to you as an investor: Stay the course. I know I sound like a broken record, but this advice is solid. Don’t panic and try to immediately switch up your investments if they’re not doing as well as you’d hoped. If your portfolio strategy is solid, then modest or even negative returns just mean that this isn’t the right time for your investments to show you their successes.

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No, patience isn’t easy. But it pays you back nicely in the long run. Sticking with your well-thought-out investment strategy even when you think you could outsmart the market requires yet another virtue: Humility.

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Investor Virtue #5: HumilityIf you play poker, you may already know that the most dangerous way

to approach the game is to assume you’re the smartest person at the table. Overconfidence—or a lack of humility—almost

always leads to disaster.

I tell clients and friends all the time that the same is true of investing: If you think you’re smarter than everyone else—and can even

out-strategize the market itself—you’re mistakenly believing you have skills you don’t really

possess. In particular, you’re fooling yourself if you think you can time the market and determine when to buy and sell your investments. The truth is that even financial professionals can’t time the market. It’s just not possible.

As I explained in my blog on overconfidence, a well-known study by UC Berkeley’s Terrance Odean showed that overconfident investors tend

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to buy and sell more often than their more humble peers. Constant trading caused investors to lose money, and make the wrong decisions at the wrong times.

In my opinion, investors who possesses the virtue of humility will:

• Admit that they can’t time the market or outsmart everyone else

• Maintain a well-diversified portfolio, since they know they can’t accurately pinpoint the most profitable investments

• Refrain from making impulsive changes to their portfolio, because they don’t assume they have a crystal ball and can foretell the future

• Seek the counsel of experts, and incorporate those insights into their investing strategy as appropriate

“I Don’t Know”Being humble means being okay with admitting that I don’t know. That may be the most powerful admission a wise investor can make. Most

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investment mistakes are made because of false confidence over future events or how a specific investment will behave.

As a professional investor, it takes courage even for me to admit to what I don’t know. After all, aren’t clients paying me to “know” a lot of investment-related strategies? I do know I can determine if an investment is a good bargain. I know which investments are good diversifiers. I know when I am being compensated well enough to take risk. I know when I’m not being paid well enough to take risk. I know I can evaluate the level of risk I am taking. In other words, I know what I can do and what I cannot do.

The “I don’t knows” are why I diversify. “I don’t know” is why I don’t time markets. “I don’t know” is a good reason why I’m skeptical of new investments. I take time to do analysis on new investments because there are things “I don’t know.”

Admitting “I don’t know” is a powerful statement for a wise investor with humility.

Putting it all togetherIn addition to humility, I’ve described in this blog series how important it is for investors also to possess the virtues of curiosity, courage, thrift and patience. So which of these are the most important characteristics upon which to focus?

Actually, the answer is: all of them. These five characteristics are really very synergistic. They work together like puzzle pieces. In order to be a more disciplined investor, you would do well to develop all of these virtues. RegentAtlantic can help.

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Christopher J. Cordaro, CFP®, CFA, MBA

Chris Cordaro is Chief Investment Officer and architect of RegentAtlantic’s investment philosophy and planning structure. Chris manages client relationships and provides advice to the Firm on concentrated stock positions, stock options and executive compensation plans. Chris has been providing wealth management services since 1985. He is a regular guest on CNBC, has appeared on Bloomberg Business, Nightly Business Report, and YahooFinance, and is quoted regularly in media, including The New York Times and The Wall Street Journal. In addition to a BS in Economics, an MS in Financial Planning, and an MBA in Finance, he holds the CERTIFIED FINANCIAL PLANNER™ and the Chartered Financial Analyst® certificates. A former adjunct

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faculty member at Fairleigh Dickinson University and the County College of Morris, he has served as past president of the New Jersey Chapter of the Financial Planning Association and on the Advisory Board of Financial Advisors for T.D. Waterhouse. He is a member of the Neighborhood Nonprofits Group, and also serves as a Member of the Board of Trustees for the New Jersey Metro Chapter of the National Multiple Sclerosis Society.

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