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Change Your Mindset with Wisdom's Advices on Value Investing

Investing with value style is nowhere close to easy. Stock market is so simple that we can always make money if we buy low and sell high, right? Yet it is against our human nature to buy anything when we are in danger of losing our jobs. Please allow me to quote a line from “the Matrix” movie in a different context: “To deny our own impulses is to deny the very thing that makes us human.” – “To deny our fear and greed is to deny the very thing that makes us human”.

And yet, in the stock market, we will need to deny our own natural impulses to make the right choice: We need to buy when the market is beyond panic, and sell when the market is over enthusiastic. Wisdom on Value Investing” by Gabriel Wisdom (Wiley Publishing) prepares you for the right mindset. If you can take in information bits here and there from reading the book, subconsciously you might have some better idea of how you can be different when thinking about investment.  

Wisdom cut into the core of the mindset in the first chapter, which laid down 10 traits of the world’s greatest bargain hunters. The first trait is the default “buy when everyone is complaining, and sell when they are celebrating”. To achieve this, one would need to stick to one’s own methodology, have an exit strategy, properly diversified, and understand what risks truly are.

Value investing means that we will need to find fallen angles, such as Apple in 1997. At that time most people, including me, believed that Apple would fail due to slowness of innovation in face of the fast ‘copy and paste’ of Microsoft. Wisdom tried to offer a way to identify fallen angels against falling angles, who we should not really touch until it is truly has touched the bottom: identify those companies who still grow book value 15% annually but discounted 50% by the market. 

A big portion of this book is devoted to how to identify fallen angles in various ways: identifying nature and business cycles, identifying demographic patterns, and stock screening. Many books have covered these topics before, but Wisdom brought new lights onto them. For example, we can identify one-time calamity that will go away. Quite a few companies have stock price fallen with uncertainties of lawsuits. Once these uncertainties are lifted, their stock prices go back up.

Wisdom also touched the topic on how to sell, which is often a problem for investors due to confirmation bias. His solution: 1) sell when the reason to buy no longer exist, 2) Sell when you have a quick profit, 3) Sell when a better opportunity comes along. Many times we fail because we cannot remember our lessons well. Reading Wisdom’s advices once again may help remind us the weakness of our mind.

For people who want to have a relaxing reading to have an understanding on value investing, Wisdom’s book is your choice. But be advised that value investing is nowhere close to easy and getting your mindset adjusted to value thinking is anything but natural. Wisdom's book only shows you the door; it is you who will walk cross it.