Learning from Douglas H. Bellemore

Sometimes, I think those of us in the investment business strive to obtain the abilities of Star Trek’s Mr. Spock.  Spock, the half-human half-Vulcan, learned to ignore the human emotions buried inside his self and use logic in order to solve the problems before him.  Just think, what great investors we could be if we could simply control our human nature.  As a Vulcan, we could construct an investment portfolio that would produce higher returns than any human could produce.  As a Vulcan, we would not worry about commissions and taxes, or have any qualms about borrowing someone else’s money to use and invest.  After all, our Vulcan logic could easily create the portfolio that not only covers any and all costs, but would effortlessly reside on the “efficient frontier,” where no man has gone before.

Of course, striving to be a Vulcan carries a terrible price with it.  Think of what your life would be like without joy, happiness, fear, love, anger, worry, greed, sadness, hopefulness, cheerfulness, sympathy, helplessness, excitement, relief...and so much more that makes us human.  One of the characteristics of exceptional investors is their ability to understand those human emotions that impact our ability to profit through investing.  A few of these individuals have shared their thoughts with us on this topic through their writings, including Douglas H. Bellemore.
Doug Bellemore taught investments for 40 years at New York University’s night school.  I would have loved to have taken a course from him, along with many other excellent investors that chose to share their insight through teaching.  But alas, I could only learn from them through the written word.  I found out about Mr. Bellemore in a round-about way; by reading a court case.  In the late 1960’s Etson B. Jeffress the sole owner of Concord Mobile Homes sold his business to Champion Home Builders Company.  Without getting into the details, a lawsuit ensued between the parties that ultimately led to a determination of liability through the courts.  The experts involved in the valuation of Mr. Jeffress’s company included a younger Martin J. Whitman (I have mentioned Marty Whitman many times as one of the nations great investors) and Douglas H. Bellemore.  The courts use of the valuation models produced by these gentlemen and two others, Douglas A. Hayes and Baird P. Swigert, is still worth studying, for anyone interested in the valuation of business.

In 1963 Simmons-Boardman Publishing Corporation published his The Strategic Investor. What follows are pages 23-25. Since Mr. Bellemore wrote this book, the size of the markets has increased dramatically in total value.  In addition, new products and services created and offered by the financial services industry have changed the way a conservative or aggressive investor can participate in these markets.  What Mr. Bellemore considered an aggressive or conservative investor doesn’t have the same meaning in today’s world.  So as you read the passage, pay less attention to these descriptions and concentrate on the human characteristics that are just as important for all investors today as it was 50 years ago.

Until next time,

Kendall J. Anderson, CFA

Characteristics For Success As Aggressive Investors

By: Douglas H. Bellemore.

Not all investors have the innate or acquired personal characteristics that are mandatory to succeed in building a portfolio of common stocks that will significantly outperform the market over the years.

What are the traits required for success as aggressive investors? Basically they are five:

1. Patience. The aggressive investor should not expect quick results although occasionally this occurs. Success depends, in large measure, on the ability to select undervalued situations not presently recognized by the majority of investors and to wait for expected developments to provide capital gains which may only come after several years. After the investment commitment has been made, he must calmly hold common stocks, perhaps five to eight years. Individual investment in this sense is not unlike corporate investment, in which management must wait in order to reap benefits of new investment programs. Results cannot be expected to come quickly. In fact, many of the personal qualities for successful business management are the same as those for an aggressive investor.
2. Courage. The investor must have solid convictions and the courage and confidence emanating from them—that is, courage, at times, to ignore those who disagree. Resembling the courage displayed by top corporate management, it is tantamount to willingness to make and to accept responsibility for difficult decisions.
   Decision-making ability, which is the key to success in business, is vital to success in investing. Although not all decisions will be correct, a high majority must be. Decisions should be made only after careful analysis of facts and consideration of recommendations. But it is this willingness to differ and to accept responsibility that distinguishes the top executive and the top investor, assuming, of course, judgments are right more often than wrong.
3. Intelligence. To realize success, the aggressive investor must possess average intelligence, but by no means does he need to be a genius. Intelligence alone, however, is by no means the only requisite for success. Common sense—impossible to test except by experience—is equally important in judgment decisions. Many highly intelligent investors have had poor investment records because they lacked common sense, i.e., the down-to-earth, practical ability to evaluate a situation.
4. Emotional stability. Although akin to patience this trait is broader in scope. Initially, it is needed to prevent the investor from being engulfed in waves of optimism and pessimism that periodically sweep over Wall Street. Moreover, it is required to separate the facts from the entangled web of human emotions. Bernard Baruch said once that most facts reach Wall Street through “a curtain of human emotions,” and even sophisticated professionals in Wall Street find difficulty in distinguishing fact from emotion.
5. Hard work. To be successful an aggressive investor must do thorough research which requires considerable time and effort. He must be knowledgeable about the company in which he considers making an investment, the industry, the position of the company in the industry, and the place and future of that industry in the economy as a whole. Furthermore, he must do considerable financial analysis for which he must have some general knowledge of statements. Although not on the advanced level of a professional security analyst, he must adequately determine relative financial strength and earning power and project future earnings. The fundamentals of accounting and corporation finance can readily be self-taught for these purposes.
   Brokers, of course, through the services of their research departments are a great help in stock analysis and will do much of the work of ferreting out facts; nevertheless, the investor can never escape judging the facts himself, and this takes knowledge.
6. Willingness to sacrifice the investment protection of diversification. Diversification based on the insurance principle can considerably reduce investment risks, although it cannot be achieved haphazardly. Nor can diversification be substituted for a certain amount of investment judgment, although a portfolio large enough to be distributed rather evenly among New York Stock Exchange stocks or all major industrial stocks would, for all practical purposes, reduce risk to that inherent in common stocks as a group. But diversification, say, among 20 or 30 stocks, cannot substitute for investment judgment.

While the conservative investor relies extensively upon diversification to minimize risks, his aggressive counterpart must sacrifice wide diversification if his portfolio is significantly to outperform the general market. Although wide diversification reduces risks by offsetting mediocre selection with good ones, it also reduces substantially the profit or capital gain potential of a portfolio. Just as no speculator ever amassed a fortune while following the principle of diversification, no investor who expects his portfolio to outperform the averages significantly and to provide major capital gains can practice broad diversification.

Finally, each investor must ask himself whether he meets the qualifications that have been discussed for successful investing. Failure to meet any of these makes it probable that by following an aggressive approach to investment, the investor will have a poorer record than if he adhered to the tenets held by the conservative investor. Should the investor decide to become conservative, he will at least have the satisfaction of knowing he should do considerably better than the unqualified investor who attempts to pursue aggressive tactics.

There are no short cuts to successful investment for aggressive investors. To earn really sizeable capital gains requires substantially more effort, patience, courage, and intelligence, than that required of the conservative investor.

It requires much more on all of these counts. As in other fields, the investor cannot get something for nothing. Once the investor has selected his own investment classification, he must pursue adamantly the principles of his particular group.