Why Value Investing Requires Thoughtful Arrogance

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Volatility can be both a feature and a bug of investing. Value investors attempt to treat it as a feature. We try to take advantage of the exuberance of the upswing and the pessimism of the downswing. I use the words attempt and try because though this approach sounds great in theory, reality proves to be a lot more challenging. This gap between theory and practice is created because volatility doesn’t waltz in a vacuum.

Upswings are accompanied by optimism and positive news, or at least the positive spin the crowd puts on the news – this pushes a stock up. Downswings don’t happen in a vacuum, either; they are accompanied and usually driven by negative news, which results in Mr. Market marking down the value of your initial investment. Fear sets in. What if Mr. Market is right? What if this new news and the army of commentators on CNBC are right?

As the great American philosopher Mike Tyson said, “Everyone has a plan until they get punched in the mouth.” Theory gives you the game plan (buy more when the stock is down), but then the market punches you in the mouth.

Our ultimate goal is to narrow the gap between theory and practice and take advantage of volatility. We do this through thoughtful arrogance.

Let me explain.