If you think I am going to talk about some mystical way to increase your luck in stock market, then you’ll be disappointed. Being fortunate in life and in investing is largely about increasing your odds of success. And how do you increase your odds?

“Study the principles of sound investing and work hard to implement those principles,” you might say. But is that sufficient? Studying, reading and working hard are all necessarily conditions for being successful in the stock market, however they are not sufficient. You need one more thing.

Let’s turn to world’s greatest investor to give us some clue. In his 1982 letter to investors, talking about two of his managers Phil Liesche and Ben Rosner, Warren Buffett wrote –

Both Ben and Phil ran their businesses for Berkshire with every bit of the care and drive that they would have exhibited had they personally owned 100% of these businesses. No rules were necessary to enforce or even encourage this attitude; it was embedded in the character of these men long before we came on the scene. Their good character became our good fortune. If we can continue to attract managers with the qualities of Ben and Phil, you need not worry about Berkshire’s future.

The lesson for an investor is that in stock market, you’re not just in the business of finding good businesses. Your real job is to find people who are running good businesses. That brings good fortune.

The words “we are fortunate” appears more than a dozen times in Buffett’s letters. Every time he has uttered those words, it was to describe his association with great managers running the businesses Berkshire owns.

Time and again Buffett has extolled the significance of associating with good people. In his 1987 letter, quoting Winston Churchill, he wrote-

Churchill once said, “You shape your houses and then they shape you.” We know the manner in which we wish to be shaped. For that reason, we would rather achieve a return of X while associating with people whom we strongly like and admire than realize 110% of X by exchanging these relationships for uninteresting or unpleasant ones.

It’s not sufficient to find a great business and ignore the character of the management. If you invest in a great business which is being run by crooked or dishonest management, it may bring profit to you in short term. However, on the longer term you will end up regretting your decision.

I have seen an example of this in my life. In 2008 I had a colleague who was assisting (part time) a group of people in setting up the technical infrastructure for a mobile software startup. He was working very hard because he had a full time job and he was also working nights and weekends in the startup. Although he was excited about the work, he would always complain to me about the integrity of his partners because of their questionable practices of generating funds for their operations. In the end, he was left with a personal debt of few lac without any results for his years of hard work.

Working with unscrupulous people, even if they’re on your side, is a deliberate invitation to misfortune. As Thomas Phelps wrote in his book 100 to 1 in the Stock Market – “Remember that a man who will steal for you, will steal from you.” Put simply, you can never strike a good deal with a bad person.

A wise man once said, your future is decided by the books you read and people you associate with. When you buy a stock, you decide to associate, albeit indirectly as a minority shareholder, with the owners/managers of the business. You’re essentially putting a trust on the managers running the business.

That person may be extremely good in his job, he may be a very smart businessman. He may also be growing the business profitably. But if you aren’t sure about his honesty and integrity then heed the advice of Woody Allen who said, “While the lamb may lie down with the lion, the lamb shouldn’t count on getting a whole lot of sleep.”

Once you find a good business, being run by competent and honest management, stick with it for a longer term, provided the quality of the business and management doesn’t deteriorate. Because the moment you break the partnership, you’re left with a task of finding another honest manager, which by the way isn’t an easy task.

Don’t be a fair-weather friend to the good stocks in your portfolio.

What if an honest manager suddenly turns evil? Well, chances are that he was always crooked, and you failed to judge his character. In that case, learn from it and move on.

At the same time, it’s delusional to hope that a dishonest CEO will have a change of heart. Crooks turn into saints only in movies and stories. It’s not impossible but very uncommon because people don’t change. Turnarounds seldom turn – Buffett may have said this for businesses, but it’s equally applicable to people’s character.

If a CEO has been known to display a clean character for a long time, he will seldom turn out to be of questionable character in future.

Fortune favours the brave, goes the saying. And in investing, fortune favours those who are brave enough to stick with their honest and competent partners through the ups and downs of market cycles.

Surround yourself with people who posses the qualities that you admire. Who inspire, uplift and motivate you. Who set the right example by doing the right thing.

How do you find such people? Let them find you.

Like attracts like. Which means the best ways to find honest people is to be honest yourself. If you develop a good character yourself and practice those qualities which you’re looking in others, it attracts similar people in your life. I can personally vouch for it. The strategy has worked remarkably well in my life so far.

In the end, Lady Fortuna doesn’t just smile on honest business people. She likes anyone who possesses a good character.

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