Source: Buffett Book Club

We often say that investment requires 'the ability to endure solitude and maintain prosperity.' The primary aspect here is 'endurance.' In the past, when I heard people say things like 'some personalities might be inherently unsuitable for investing,' I was skeptical, always attributing poor investment performance to insufficient understanding.

Upon revisiting Munger's words, I realized that many of my friends are just like this. They are always prone to worry: Will this company’s poor quarterly results lead to a limit-down? With a weak macroeconomic environment, is there no market opportunity left? If the pandemic continues like this, is the stock market doomed? Sell after earning a limit-up, or cut losses deeply after a significant decline... Those who lack patience naturally read less, let alone conduct meticulous research and comprehensive analysis. When facing good companies, they find it hard to convince themselves to patiently wait for an attractive price before buying. Even if they hold quality stocks, they will struggle to maintain their positions amid any minor fluctuations.

Graham said: 'A successful investor typically possesses a calm, patient, and rational temperament, whereas speculators are quite the opposite. They often fall into anxiety, impatience, and irrationality. Their greatest enemy is not the stock market but themselves. These individuals may excel in mathematics, finance, and accounting, but if they cannot control their emotions, they will naturally fail to profit from investments.'

Graham had a profound understanding of the emotional storms in the stock market, making many modern psychologists feel inferior. He believed that true investors succeed not only because of their capabilities but also due to their unique temperament—a viewpoint that remains valid today as it did then.

These temperamental characteristics differentiate investor behavior. Speculators try to predict price movements to profit, while investors seek to buy company stocks at reasonable prices and hold them long-term, waiting for value to flourish.

In the books 'The Essence of Investment' and 'Graham’s Growth Stock Investment Strategy,' the authors both emphasize that successful value investors need a certain 'temperament.' This temperament essentially reflects Graham's notions of patience and rationality. From years of investment experience, we believe that successful value investors must also possess humility, a passion for learning, and a special shareholder mindset.

I. Patience

True investors are not swayed by enthusiastic atmospheres or glamorous conceptual facades; instead, they wait for the right opportunities to emerge. More often than not, they rationally decline rather than blindly follow.

Discovering value requires patience. Peter Lynch highly appreciated the 'value investing strategy of turning over stones,' which means investors should be adept at pragmatically 'turning over stones.' Like flipping over rocks, they examine thousands of companies, yet only a few can be placed in the basket for heavy investment. The extensive work of 'turning over stones' inevitably implies extraordinary hardship, often repetitive and fruitless, but this is the foundational work of an investor. To find suitable materials for filaments, Edison conducted 1,200 experiments, failing each time. When someone said to him, 'You have failed 1,200 times, will you continue?' Edison replied, 'No, I haven’t failed; I’ve discovered that 1,200 materials are unsuitable for filaments.' Most of the time, investors use the process of elimination. But to find a small number of genuinely good companies, investors need not only physical and mental effort but also the patience and willpower to persist in finding quality companies.

When recalling his time working for Graham-Newman Corporation, Buffett mentioned that his task was to analyze potentially purchasable stocks, while Graham would reject most of his suggestions. Buffett said, 'Unless all facts favored him, Graham would never buy a stock.' From this experience, Buffett realized that being able to say 'no' is one of the greatest advantages of an investor. Do not fear saying 'no.' Evaluate every investment opportunity prudently, as if you could only make 20 investment decisions in your lifetime.

Buffett believes that nowadays, too many investors feel compelled to purchase more stocks (even though they are destined to be mediocre) rather than patiently waiting for the emergence of a few excellent companies.

To reinforce Graham’s teachings, Buffett often uses the metaphor of a punch card. He says, 'When making investment decisions, investors should imagine having a decision card with only 20 punches available in their lifetime. Each time they make an investment decision, a punch is made on their card, reducing the number of remaining punches.' If investors’ behavior were restricted in this manner, it would force them to learn patience and wait for truly favorable investment opportunities to emerge.

Value growth and the compounding effect require patience. After completing portfolio construction, achieving target returns depends on the compounding effect, which needs time and patient perseverance. Many investors excel at buying at market bottoms, selecting good companies, but often sell after earning only a few percentage points. We still recommend that investors avoid chasing multiple small gains. Instead, seize the right moment to buy good companies, place significant bets, and then patiently wait—enduring solitude while holding onto prosperity. Over 11 years of steadfastly holding Fuyao Glass, 8 years for Tencent and Ping An, and 3 years for Biological Shares and LONGi Green Energy Technology have yielded substantial returns. The root of these gains lies in the companies’ value growth. Friends with business experience know that whether it’s realizing R&D outcomes, improving product yields, or building teams, none of these happen overnight. Though imperceptible day by day, accumulation leads to growth and transformation without notice.

Mr. Martin, author of 'Graham's Growth Stock Investment Strategy' and DGI Fund Manager, began investing in Apple when it was still primarily focused on PCs in 1998. His position-building process was not completed until 2002, and by 2013, when Apple entered the mobile intelligent era, Martin’s investment return had reached over 50 times the initial investment.

II. Composure

Under the influence of various rational and irrational forces, stock prices fluctuate between rises and falls. When stock prices decline, they remain calm because they clearly understand that as long as the company retains the qualities that initially attracted investors, prices will eventually rebound. Therefore, they naturally do not panic.

When a particular stock, industry, or mutual fund suddenly becomes a market hotspot, retail investors tend to rush in. However, trouble soon follows, as when everyone acts arrogantly and makes the same choices, no one ends up making money. At the end of 1999, Fortune magazine published one of Buffett’s viewpoints: the popular notion of 'PARTY you can’t miss' attracted numerous bullish investors. Buffett’s point was that true investors don’t need to worry about missing a PARTY—they worry about not being ready to attend the PARTY.

How to face market volatility is the touchstone for value investors. To describe the madness and unconsciousness of market fluctuations, Graham created the allegorical character 'Mr. Market.' Buffett frequently shares Graham’s story of 'Mr. Market' with Berkshire Hathaway shareholders. Imagine: you and Mr. Market are partners in a privately held enterprise.

Every day, Mr. Market, come rain or shine, will tirelessly offer a price at which he is willing to buy your shares or sell you his shares. The two of you are fortunate enough to own a stable company, but Mr. Market’s quotes are completely erratic because his emotions are unstable.

Sometimes, he is very happy, optimistic, and sees a bright future ahead. During these periods, he will quote an extremely high price for your shares. Other times, Mr. Market becomes disheartened and pessimistic. At such moments, he can only see the troubles before him and has no hope for the future, offering a very low price for your shares.

When Mr. Market is in an extremely pessimistic mood and conducts fire sales, rational investors often choose to buy heavily because the margin of safety is larger and the potential return on investment is higher. In our view, Mr. Market is like an intermittently insane person, and whether an investor chooses to follow his madness or calmly take advantage of him becomes the litmus test for rationality.

On this point, Buffett’s perspective is even more direct: unless you can remain calm when your investment depreciates by 50%, you should not invest in the stock market. He further elaborated: as long as you are satisfied with the company whose stock you hold, you should accept its price decline with equanimity, because it is only when prices fall that you can buy more and earn greater returns.

Value investors never mind being overlooked. For investment success, investors must first have sound judgment about companies and avoid being swayed by the emotional vortex released by 'Mr. Market.' A key factor in Buffett's success is that he consistently avoids being influenced by stock market sentiment. He attributes this ability to Benjamin Graham and Mr. Market, who taught him how to remain unaffected by market sentiment. Investors’ focus should be on whether they can derive more value in the future; others’ buying or selling has nothing to do with them. Rational investors, if confident in a company, won’t care if Mr. Market throws it into the trash bin, nor will they worry about whether their views on the company are endorsed by Mr. Market or other experts.

More than 60 years ago, Graham began studying irrational phenomena in the market and was the first to introduce the concept of 'Mr. Market' to the public. However, over 60 years later, while the times and corporate development have advanced rapidly, human nature has evolved very slowly. Investors’ behavior has hardly undergone any noticeable changes. They continue to engage in all sorts of irrational behaviors. Foolish mistakes are repeated day after day, and fear and greed persistently linger in the market.

III. Rationality

Successful investors are neither overly pessimistic nor blindly optimistic. On the contrary, they always maintain logical thinking and act rationally. What puzzles Buffett is that too many investors habitually reject markets that best serve their interests (such as buying opportunities presented by market crashes) but favor markets that are consistently detrimental to them (such as rising prices making stocks increasingly expensive, causing excellent companies to lose investment value and margin of safety). They become ecstatic when market prices rise and lament when prices fall.

In Buffett’s view, when everyone begins to fall into pessimism, true investors feel delighted because they finally get a good opportunity: to buy the best companies at discounted prices. He says that pessimism is 'the most common reason for falling prices... We want to start investing in such an environment not because we are pessimists but because we love the opportunity to buy at low prices brought by pessimism. Optimism is the real enemy of a rational buyer.' He always acts based on the overall market sentiment: 'Be fearful when others are greedy and greedy when others are fearful.'

Investors with a rational disposition find investment opportunities from the perspective of value discovery and place 'big bets' by heavily investing when target returns are met.

Rational investors do not confine themselves to emotions or stubborn opinions; their primary task is to discover truth and value. When they realize they have made a wrong judgment or detect signs of a trend of deteriorating company growth, they decisively liquidate their holdings. Even if it involves industries they once loved or projects into which they poured significant effort, when objective facts and assumptions about future returns cannot support the expected future value realization, they will resolutely self-correct. This is their discipline. Of course, refusing to admit mistakes in investing will inevitably lead to failure.

Rational investors avoid blindly following the herd. The investment process is essentially one of seeking out oversights or irrational decision-making opportunities from other investors. During the 2020 pandemic, excellent companies saw their stock prices discounted amid circuit breakers. Amid market panic, even Buffett remarked, 'Live long enough, and you’ll see everything.' At such moments, rational investors need to act decisively by buying. We did just that, and subsequently, the market rewarded our rational decisions handsomely.

Rational investors do not rush into the market based on hearsay. Fortune does not fall from the sky; instead, pitfalls do. Rational investors objectively assess the actual progress of an industry and a company’s development, either through repeated research and investigation or by cross-verifying information, ultimately confirming the certainty of a company’s long-term (growth or lack thereof). Rational investors often disregard rumors and management presentations. Some companies may experience rapid short-term performance growth, but the sustainability of their long-term growth is questionable. Some companies continue to pay dividends, yet their profitability is meager and debt-laden. Some executives inform you of major upcoming company moves, only for you to buy at a high price while they aggressively reduce their holdings.

Munger believes that the core competence of investing, the most important ability, is to maintain rationality, emotional stability, and to consistently remain rational in the face of stock price fluctuations. Knowledge and enterprise valuation are fundamental, but the prerequisite is that you understand and can maintain rationality and emotional stability. But what exactly is rationality?

Munger further explains that rationality means being realistic. Most people see the world as they wish to see it. If this is the case, it is like viewing the world through distorted lenses—no amount of knowledge or patience will help. Because the world you perceive is disconnected, without a rational attitude, nothing else matters.

IV. Shareholder Character

Many people buy stocks without knowing the companies behind them or simply because the stock name or the company's business aligns with a certain concept. Their profit model is to hope for a rise after purchasing. Where does the money earned from this ideal model come from? It most likely comes from Mr. Wang next door buying in. Mr. Wang’s losses could lead to tragedy. In a sense, although the money earned from this model is legal, it is still stained with blood and filled with harm. If we consider ourselves shareholders, we would think about earning profits and dividends from the company’s legitimate operations—this is the return for supplying products and providing services to society.

In fact, legally speaking, stocks represent investors' ownership rights in a company. Therefore, buying stocks means purchasing partial ownership of a company, and the intrinsic value of a stock is the company’s intrinsic value. Similar to unlisted company equities, stocks can be freely traded on the securities market.

Benjamin Graham: Buying stocks is buying part of a company; treat stocks as partial ownership of a company. To succeed in the stock market, one must first think correctly, and then think independently. Clearly, cultivating shareholder awareness is a prerequisite for correct thinking.

Understanding that buying stocks means buying ownership in a company helps investors advance from entry-level to advanced cognition.

Especially, ordinary investors often place significant emphasis on current earnings per share (EPS), which reflects a simplistic financial mindset. However, when they consider issues from the perspective of a company owner, positioning themselves as operators standing alone in the company’s empty yard contemplating the competitive environment and future prospects, they can easily transcend financial thinking and enter into a business-oriented mindset.

Shareholders need to possess both financial and business mindsets. Most financial investors only have a financial mindset, but 'an excessive focus on financial thinking overemphasizes the factor of returns, leading to the following three disadvantages:

(1) Applying normal business thinking, purchasing a company requires dual consideration of assets and earnings, which is more reliable than an assessment method that solely emphasizes earnings.

(2) Compared with assets, changes in earnings per share are more volatile, introducing an exaggerated sense of instability in stock valuation.

(3) Earnings per share can easily be manipulated. Investors must analyze the balance sheet data at the beginning and end of the period to truly understand the meaning of the income statement. (The use of earnings per share as a valuation reference should only be considered after taking into account factors such as the quality of the company's liabilities, growth cycles, and industry cycles.)

What we should do most in the investment process is return to common sense and invest using normal business thinking. Start with net asset value as the foundation and adhere to it, then consider other factors.

At the same time, once we adopt a shareholder mindset, it becomes easier to embrace the notion that investors are entrepreneurs – participating in the creation of social value through equity and securities investment.

Unlike entrepreneurs, we have an additional layer of significance in asset allocation, granting us greater choice – selectively allocating funds to companies that can continuously and efficiently create positive social value. With a shareholder mindset, investors will pay more attention to the company’s investment direction and development quality, focus more on the essence and intrinsic value of the company, and look further ahead, thereby disregarding various market noises.

Of course, if you can persist in this approach over the long term, there is no doubt that you will become a long-term winner in the company’s development. The qualities of shareholders or bosses are not innate or naturally achieved. Let me share a small story.

More than ten years ago, I worked at a certain group company where a shareholder assigned his cousin to train in my department. During that time, he was particularly fond of playing Mahjong, often staying up all night, resulting in him being exhausted or even sleeping during work the next day.

I once had a heartfelt conversation with him. He said that he was just going through a phase and that his father had already arranged for him to manage a small factory in the family business, believing that being his own boss would change things. About a year after he left, when I heard colleagues mention him again, I learned that he had ruined the factory by gambling, and he had been kicked out of his home.

5. Humility and Eagerness to Learn

Humility allows us to make the most conservative decisions within our circle of competence. Mark Twain once said that what gets us into trouble is not ignorance but the illusion of knowledge. Humility implies reverence for the world. In a sense, the development of the world is determined by what we do not yet know. With today’s technological advancements, the world we see represents only 5% of the entire universe. Compared to 1,000 years ago when humans were unaware of air, electric fields, magnetic fields, elements, or even believed the sky was round and the earth square, the scope of our unknown world is vastly greater—so vast it is unimaginable.

We often say that failure is the mother of success because failure helps us better understand the world. There is another saying we must remember: “Success is the mother of failure.” Overconfident individuals tend to judge the world based on existing knowledge and experience, like the futile act of marking a boat to retrieve a lost sword.

The more success people experience, the more they attribute it to their abilities while ignoring the role of luck. This overconfidence leads to arrogance and contempt for markets, the world, and even common knowledge and principles, inevitably resulting in losses and failures. Feng Liu once warned investors during a sharing session that intelligence is abundant in this market, but individual power is insignificant in the face of complex systems. One should abandon excessive cleverness, stay humble, and approach investing with common sense, faith, and a bit of luck.

To keep up with the evolution of the times and technology, we need to maintain reverence for the market and the universe, and continuously motivate ourselves to learn, in order to better understand ourselves and the world.

Most successful investments occur within one's circle of competence. Through fifty years of practice, Buffett has shown us that investors can truly build their circle of competence through persistent effort. The core of what Buffett refers to as 'effort' is learning. Li Lu, Charlie Munger’s business partner, once stated that what truly drives the compound growth of investment returns is the expansion of an investor’s knowledge and thinking ability.

Every successful investor practices lifelong learning. They read extensively and constantly think about the future in their daily lives. Even at nearly ninety years old, Buffett rises on time every day and spends a significant amount of time reading various news articles, financial reports, and books. His office has no computer, no smartphone—only books on the shelves behind him and newspapers spread across his desk. Reading has shaped Buffett’s life and wealth. His partner, Charlie Munger, once remarked: Every highly intelligent person I’ve met in any field reads every day—without exception, none of them don’t.

The sheer volume of Buffett’s reading might astonish you—he is like a walking bookshelf. Similarly, Munger is also a model of someone who loves learning. Mr. Li Lu has met with Munger multiple times, and before their scheduled discussions, Munger is always found reading newspapers. The master of contrarian investing always carries research reports to read during flights or delays.

The other day, while chatting with a leader, he asked me what the greatest pressure in my current job was. I replied that it was learning. The unknown world is vast, and science progresses every day. Without continuous learning and research, one risks falling into the trap of the blind men and the elephant. Especially when first engaging in primary market investments, many projects seem promising at first glance. The reason they appear attractive is due to a lack of understanding of the relevant industries. Only after deeper analysis do we realize that the technologies these projects rely on are already mature within their sectors, though they may not yet be widespread domestically.

Investors need to be eager to learn, but not merely curious. Curiosity is important, yet if it remains only at the level of curiosity, it can lead to superficial observations and a lack of focus, preventing the accumulation of knowledge; what is seen may not necessarily reflect reality, and failing to grasp the essence can lead to being deceived by appearances. The kind of eagerness to learn that investing requires generally falls into the following categories:

(1) Focus, concentration, and in-depth learning.

It is better to drill one well than to dig ten pits. Investors need to engage in continuous learning and observation within fields they are familiar with or interested in, gaining an understanding of technology, markets, trends, and logic. The identity of an industry expert helps identify industry trends and cultivate professional thinking. Mr. Li Lu, the manager of the Munger family’s assets, once mentioned in a sharing session that neither trading nor research should follow the crowd.

He said that this is because everyone's circle of competence is different. Each value investor's portfolio tends to be unique. There is no need to communicate excessively with others. Other people's stocks and opportunities are their business and have nothing to do with you; you just need to focus on your own affairs. We often say that someone else's beautiful girlfriend is their business, not yours. It is better to drill one well than to dig ten pits. Following trends—jumping on others’ research topics out of mere interest—will trap you in an endless cycle of starting new projects without completing any. It will be difficult to achieve meaningful results.

Li Lu further noted that truly understanding an industry and thoroughly analyzing a company usually takes many years. However, the benefit of 'continuous focused research' lies in the fact that knowledge accumulates and compounds over time. When knowledge and investment grow simultaneously, you experience the joy of logical validation, while this positive feedback loop also allows knowledge to grow exponentially through compounding. Therefore, he said, the longer you invest using this method, the better the results will be.

(2) Multi-channel, comprehensive, systematic learning and thinking.

This includes learning from practice, from the market, and from everyday life. For a specific industry, it is essential to learn as much as possible from upstream and downstream supply and demand participants. In daily practice, multi-dimensional observation of an industry is an excellent way to learn. For example, an industry has many interconnected chains both upstream and downstream. When changes occur in the industry’s conditions, how will these upstream and downstream participants react? Which link reacts first? How will competitors respond? After making such theoretical deductions, you can then go into practice to verify them with data and field visits.

For instance, when we previously observed LONGi Green Energy Technology Co., Ltd.'s overseas market—one of the leading companies in the photovoltaic industry—we specifically visited another major overseas module manufacturer. During the visit, we heard similar reasoning: North America and Europe were replacing retired coal power plants with photovoltaic systems, which reinforced our confidence in continuing to hold LONGi shares. In the automotive parts sector, Fuyao Glass's vertical integration along the supply chain played a crucial role in cost control. When we saw Apple supplier Luxshare Precision Industry taking similar steps toward vertical integration, we immediately understood why the company consistently maintained high ROE.

(3) Correct, filtered, and critical learning.

The relationship between daily updated economic data and a specific company’s operations and stock price is difficult to determine. Macro data reflects the past, whereas stock prices anticipate the future. Using outdated macroeconomic information to guide predictions about micro-level companies may lead to dead ends. Recently, Chen Li, an analyst at Soochow Securities, reflected on brokerage strategy analysis, pointing out that broad market forecasting rendered the entire strategic analysis aimless, attacking targets that no one actually cares about. He suggested focusing on industry- and company-specific research and learning rather than wasting energy on irrelevant factors.

Meanwhile, every day we open trading and financial software, we are bombarded with information that often carries purpose and bias. With such advanced information tools today, as long as investors pay a little attention, they won't miss significant information; the key lies in how we discern truly important and essential information. At this point, investors need a garbage detector and filter to classify and delete junk and erroneous information. In summary, we must learn to study the right things.

(4) Use latticework thinking for interconnected reflection and learning.

To enable everyone to learn correctly, Munger emphasized that investors should adopt 'latticework thinking'—a multidisciplinary mindset. This does not mean becoming an expert in multiple disciplines but possessing the modes of thinking and key theoretical ideas from various fields. He said that overly 'expert' thinking is undesirable: 'To someone with a hammer, everything looks like a nail.' Connecting different disciplines’ modes of thinking to create an integrated latticework is the optimal decision-making model. It can also be understood as using different disciplinary perspectives to analyze the same investment issue—if the conclusions align, the investment decision is more likely to be correct.

In the technological world, such as in the electric vehicle sector, there are N types of battery solutions, including hydrogen fuel cells. Each technical pathway seems to have the potential for continuous improvement and cost reduction. Which one will ultimately be chosen? Market debates may cause investors to worry, become entangled, or hesitate. However, after studying consumer demand theory, we realize that the market prioritizes safety over cost.

In the electric commercial vehicle sector, since users regard vehicles as production tools, cost-benefit becomes the top priority. After visiting various next-generation electric commercial vehicle teams, we found that without the support of traditional financial instruments, technology alone is hard-pressed to meet the needs of individual transport drivers. What I want to emphasize is that many issues themselves are not problems; obsessing over them is futile. You must step back, think interconnectively, consider from the user’s perspective, or apply Musk’s first principles thinking.

In the world of *The Three-Body Problem*, the philosophers among ants and turkeys seem very impressive, but from a human perspective, they appear laughable. However, in the universe, would humanity’s so-called great discoveries and summaries make the God of the universe laugh? The answer is certain. To avoid narrow-mindedness and foolishness, it is suggested that investors frequently meditate, imagining themselves from the perspective of God, conducting a comprehensive scan, and projecting 10 or 20 years into the future. Then look back at the matters they care about now, considering how competitive landscapes will evolve and how times will change.

Besides the above, optimism and knowing how to face failure are also crucial, though this article does not emphasize them separately, mainly because there are already too many optimistic people, and those who fail the most often do so due to excessive confidence and optimism. Facing failure also requires rationality as its foundation; otherwise, one may fall into a self-defensive, delusional state akin to Ah Q’s 'spiritual victory.'

Genuine successful investors succeed not only because of their capabilities but also due to their unique temperament. Fortunately, qualities such as 'patience, calmness, rationality, shareholder awareness, humility, and eagerness to learn' are not innate but can be cultivated through training. Thus, you and I both have the opportunity to develop these traits through learning and practice. We refer to this process as cultivating our minds and character. Previously, we consistently emphasized that investing is the monetization of cognition, focusing on ability. The purpose of this article is to remind us that while continuously improving and learning 'knowledge,' we must also cultivate our personal characteristics.

Looking to pick stocks or analyze them? Want to know the opportunities and risks in your portfolio? For all investment-related questions,just ask Futubull AI!

Editor/jayden