Traits of Successful Investors

Everyone knows that to succeed as an investor or trader you must buy low and sell high. As simple as this concept is, the actual act of doing so is almost impossible. That is unless you are prepared (i.e. pre-programmed) to buy at low prices, or to sell at irrationally high prices. Behaviorists suggest that we are pre-wired to avoid pain and to pursue pleasure. Unfortunately, these instincts can work against you in the financial markets. It’s painful and unpleasant when prices are low and declining even further. It’s euphoric when markets are climbing beyond rational levels of value. The following 10 traits of successful investors may help improve your odds whenever the urge to buy or sell occurs.

 

Trait #1. The ability to buy stocks when everyone else is panicking, and sell
stocks while others are overly optimistic.

Mark Sellers told a graduating class of Harvard MBA’s that the ability to succeed as an investor has nothing to do with I.Q. or education. 

“Everyone thinks they can do this, but then when the market is crashing all around you, almost no one has the stomach to buy.”

Warren Buffett observed that you always pay a premium for a cheery consensus.

Trait # 2. Having a methodology. 

Great investors have a system for weighing the value of their investment holdings, which may be different from what the quoted share price is. They make a fundamental valuation case based on share price relative to revenue, free cash flow, earnings momentum, and the rate at which shareholder’s equity is compounding. This approach allows you the luxury of paying little or no attention to daily market fluctuations.

Trait # 3. Having confidence in your methodology. 

Sticking with your convictions even when facing criticism or share price declines is essential. The natural tendency for all human beings is to get confirmation from others that our actions are proper and correct. When it comes to successful investing, the crowd is often wrong.

Trait # 4. Having a purchase & exit strategy. 

Basing buying and selling decisions on intrinsic value helps successful investors stick to their guns.
Buying and selling decisions are easier if they’re pre-determined, and well thought out ahead of time.

Trait # 5. Being properly diversified, not overly diversified.

Mathematically, it can be shown that having too many stocks can actually increase your odds for poor performance. Google the Kelly Formula, and you’ll find that owning only a small 2% position in a stock is the equivalent of providing yourself a 51% chance of going up, and a 49% chance of going down. Successful investors own large positions in stocks they have conviction in.

Trait # 6. Living with volatility without changing your investment strategy.
Very few people can handle the volatility required to achieve great performance, so they over diversify hoping to reduce their risks. Because volatility is inherent in all markets, successful investors use these periods of volatility to take advantage of price discrepancies. As can be seen by the accompanying chart, the S&P 500 declined ahead of the collapse of Long Term Capital Management in 1998. The panic provided investors a window of opportunity at a time when people were concerned about the survival of capital markets worldwide. 

Trait # 7. Recognizing that volatility is not the same as risk.

Sharp swings up or down are not the same as a permanent loss of your capital, unless you panic. When investors confuse volatility with risk, they often sell when they should be holding or buying more. Successful investors benefit from irrational fears during periods of excessive market swings. This 12-month chart of the S&P 500 suggests that opportunistic investors may soon be profiting from the panic of 2008. 

Trait # 8. Learning from your mistakes.
Everyone makes them. Successful investors dwell on their errors long and hard enough to understand what they did wrong, so as not to repeat them. Even better is the ability to learn from other peoples mistakes so you don’t have to make them yourself.

Trait # 9. Understanding risk.

In the words of Voltaire, “common sense isn’t so common.” In every market cycle, we see evidence of this thru history’s frequent booms and economic busts. Whether it’s sub-prime mortgages, real-estate, or dot-com stocks, successful investors avoid potential problems by understanding risk.

Trait # 10. Pre-programming yourself to take advantage of opportunity quickly.
Successful investors are comfortable acting alone, without the benefit of crowd consensus. They are often selling when everyone else is clamoring for what they’re unloading. They are buying when no one else is interested. What they sell may go higher still, and what they’re buying continues to decline. But successful investors pay no attention to the market’s short term moods, knowing that with the benefit of a reasonable time frame, value always prevails on or off Wall Street.