Chapter 7. Have the Discipline to Say No: THE FOURTH ELEMENT

The intelligent investor is likely to need considerable willpower to keep from following the crowd.

Benjamin Graham

Arming yourself with a sound investment philosophy and search strategy puts you on the path to selecting businesses suitable for investment. Once a business is valued, the most difficult determinants of whether to invest or not come into play. Unlike valuation, which primarily relies on quantitative measures, investors now must rely on qualitative factors:

  • Having the discipline to say no

  • Being patient

  • Having the courage to make a significant investment at a maximum point of pessimism

These factors are exceedingly important because the probability of suffering investment loss is significantly higher due to the emotional underpinnings of these factors. Consider the next fictitious example.

A particular security is selling in the market for $25 a share. The strong fundamental qualities of this security are well known, and as a result, the stock has typically traded at a fair to overvaluation. At the current price of $25 a share, the stock is indeed slightly above fair value. Eager to buy, an investor is on constant watch for any dip in stock price, but the dip never comes. Instead, over the next few weeks the stock seems only to go up in price and is now at $35. Not wanting to miss out on the continued rise, the investor rushes to buy in. In the next few weeks, the stock is back at $25 and the investor, an able and ...

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