A Value Investor’s Guide To Stoicism
You don’t need Stoicism to be a value investor. In the same way you don’t need a killer step-back jump shot to play basketball. Yet if you want to excel as a value investor, you must embrace a form of this ancient philosophical practice.
Think about it.
Ben Graham, Warren Buffett, Michael Burry.
They all share a similar Stoic thread. A principled fabric that once pulled, reveals underpinnings in Epictetus and Marcus Aurelius. These great investors abide by common Stoic ways of thinking. They have an innate ability to detach themselves from an investment idea. A knack for testing ideas through unbiased, unemotional eyes. A desire to focus on the process of their strategy instead of n=1 results.
I’m not asking you to devote your life to Stoicism. That’s not the purpose of this article. All I’m doing is offering an idea. A tool in your tool-belt. Giving you a new way to view the investment landscape. I’m offering a guide for how we — value investors — can leverage Stoicism into our investment process.
What Is Stoicism?
If you’re familiar with Stoic philosophy, it will come as no surprise that most of my research includes Ryan Holiday’s works. According to The Daily Stoic (a site run by Ryan Holiday), Stoicism is (emphasis mine):
“The philosophy asserts that virtue (such as wisdom) is happiness and judgment should be based on behavior, rather than words. That we don’t control and cannot rely on external events, only ourselves and our responses.”
In the same article, Holiday notes that Stoicism teaches four main tenets:
It reminds us how unpredictable the world can be
How brief our moment of life is
How to be steadfast, strong and in control of your life
The source of our dissatisfaction lies on our impulsive dependency on our emotions, rather than logic
You already see the similarities between Stoicism and value investing form. But we’re not there yet.
When people read about Stoicism, they read of Seneca, Epictetus and Marcus Aurelius. These three men are the “Mt. Rushmore” of Stoicism. If you want to learn more about them, check out the following books:
Meditations, Marcus Aurelius
Before diving into the investment application of this philosophy, we must espouse a few common misconceptions regarding Stoicism. Once again, we go to Ryan Holiday for answers.
Common Misconceptions About Stoicism
Holiday outlines three common misconceptions around Stoicism:
Stoicism encourages a withdrawal from the world
Stoicism promotes a grim and dreary view of life
Stoicism means not feeling anything towards others
I can hear the perma-bears rejoice. A philosophy that requires constant pessimism in the face of optimism? Where can they sign up? If any of these misconceptions worries you, I recommend reading Holiday’s post. He expands upon each misconception and offers rebuttals from the three men above.
With our background details out of the way, we can dive right into Stoicism’s impact on investing. We start with (of course), Ben Graham.
Ben Graham Was A Stoic
Benjamin Graham, the father of Value Investing, was a Stoic. Don’t take my word for it. Here’s Graham’s in his autobiography (emphasis mine):
“[I] embraced stoicism as a gospel sent to him from heaven.”
This shouldn’t come as a surprise to us. Graham’s most famous book, The Intelligent Investor, harbors vast quantities of Stoic thinking. Let’s run through a few examples. Page 120-121 (emphasis mine):
“The investor’s chief problem – and even his worst enemy – is likely to be himself. (“The fault, dear investor, is not in our stars – and not in our stocks – but in ourselves” …) [Hence] by arguments, examples and exhortation … we hope to aid our readers to establish the proper mental and emotional attitudes toward their investment decisions. We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality, even though they lacked an extensive knowledge of finance, accounting, and stock-market lore”
Graham stresses the importance of proper temperament when investing in markets. And what better temperment to have than a Stoic one? Take this Marcus Aurelius quote for example:
“In your actions, don’t procrastinate. In your conversations, don’t confuse. In your thoughts, don’t wander. In your soul, don’t be passive or aggressive. In your life, don’t be all about business.”
The similarities between Graham’s thoughts and those of the Stoics are plenty.
Here’s another quote from page 203 (emphasis mine):
“The true investor … is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits [him], and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines … is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if … stocks had no market quotation after all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment”
Again we see a common thread. That not letting the market dictate your feelings matters. If you replace the word “market” with “other people” or “society”, you sound like one of the Stoic greats. To back this up, check out this quote from Epictetus (emphasis mine):
“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control. Where then do I look for good and evil? Not to uncontrollable externals, but within myself to the choices that are my own…”
Identify and separate what matters. This is powerful.
Think in the context of stock prices. If we can identify that stock prices don’t state the intrinsic value of a business, we can separate them from our control. We cannot control stock price movements.
Knowing that Graham practiced Stoicism, it’s a good bet that Warren Buffett dabbled in similar philosophy. (Spoiler, he did).
Warren Buffett’s known for a lot of things. Greatest investor of all time. Avid Coke drinker, etc. But Stoic philosophy isn’t always the first thing that comes to mind. Yet its this Stoic philosophy that propelled Buffett towards investing lore.
A few Buffett-isms off the top of my head are:
An unemotional view towards Investment Appraisal
Intellectual Framework to view the investing landscape
All these ideas — these Buffett-isms — sound like Stoicism. We see more evidence of Buffett’s Stoicism in his forward to The Intelligent Investor (emphasis mine):
“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.”
Then there’s this quote from Buffett on how to control your emotions (emphasis mine):
“You will continue to suffer if you have an emotional reaction to everything that is said to you. True power is sitting back and observing things with magic. True power is restraint. If words control you that means everyone else can control you. Breathe and allow things to pass.”
Who knows how successful Buffett would’ve (or wouldn’t have) been had he not controlled his emotions. Yet there’s another element, one far greater than Buffett’s ability to control his emotions.
That element is sitting. Waiting. Doing a whole lot of nothing. Buffett expounds on this idea of ‘doing nothing’ in another quote (emphasis mine):
“I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business. I do it because I like this kind of life.”
I love this quote. But what amazes me most about it is its similarity to a quote from Stoic pioneer, Seneca. Here’s Seneca’s take on the same idea:
“Nothing, to my way of thinking, is a better proof of a well ordered mind than a man’s ability to stop just where he is and pass some time in his own company.”
The parallels are striking. It’s evidence of Buffett’s commitment to a Stoic way of life. Even if he doesn’t parade the actual name, Stoicism.
Three Stoic Strategies For Your Investment Process
Now you might think, “that’s nice Brandon. But how do I implement these ideas/framework into my investment practice? Here’s three easy steps:
Stop Looking at Stock Prices Every Day
Write a Pre-Mortem Before You Buy a Stock
Get Comfortable With Losing Investments
Let’s break each down further.
Separate what you can control from what you can’t control. You control when you buy a stock. And you control when you sell a stock. You should have both of those prices in mind before placing an order. Christian Ryther of Curreen Capital had a rule that stuck with me. He would check stock prices once a week (Friday). That’s it.
Doing so, he’s always redirecting his focus to the long-term time horizon. I try to adhere to this rule but often break it. With 2020 around the corner, I’ve got a solid candidate for a Resolution.
Write A Pre-Mortem Before You Buy
I got this idea from (you guessed it) Christian Ryther. You can check out his YouTube video on the subject here. In short, a pre-mortem is the act of writing out how your investment will go against you over time. In other words — what would have to happen for your thesis to crumble? Figure that out before you invest a dime into the business.
When you do this, you familiarize yourself with various bearish theses. There’s a sense of comfort in pre-mortems. You know it might not work. You know why it might not work. That’s downside protection.
Stoics adhere to a healthy acknowledgement of their own mortality. Epictetus said, ““I cannot escape death, but at least I can escape the fear of it.” How true is that with stock market losses.
As investors we will experience losses. There’s no way around it. Whether your strategy offers a high slugging percentage or a low one. You will lose money. Applying Stoic thinking towards our losses helps us reckon with that inevitable result.
We can rephrase Epictetus’ quote another way, “I cannot escape market losses, but at least I can escape the fear of it.”