Traits of a Successful Investor

young adults investingThe world’s most famous investors share many traits, commonalities which make them legends in the world of capital allocation. The best investors are not gifted with luck, but raw talent that simply makes them better than most portfolio managers and financiers.

There’s more to finance than just mathematics and numbers. Having the right mindset and framework for investment decisions goes a long way in dividing the talented from the untalented.

Thinking like a successful investor

Let’s talk about what makes a successful investor. A successful investor is someone who:

  1. Thinks long-term – Investors are not traders, nor are they market timers. Successful investors invest in something which has more value than a market is willing to pay for. Some of the most successful investments have taken years to play out. It took Warren Buffett’s Coca-Cola purchase in 1988 nearly 5 years to prove critics wrong that Buffett had made a great investment. When Bill Ackman shorted MBIA in 2002 (MBIA is/was an insurance company for bonds) claiming that it no longer deserved an AAA credit rating, regulators nearly sucked him dry. MBIA management, who had a strong relationship with Wall Street banks, wouldn’t even shake Ackman’s hand when he met them in a board room. It wasn’t until 7 years later in 2009 that Ackman was proven right with a billion-dollar haul. Successful investors are willing to ignore the warnings of others and show conviction in a long-term idea, even if it’s unpopular in the short-term.
  2. Invests only in what he or she knows – Successful investors only invest in what they know inside and out. Luck should not be a part of any strategy. Unfortunately, investing only in what you know can occasionally leave you to miss a few opportunities. An investment in Apple stock 10 years ago would be worth 49 times the purchase price today. But could you really see an iPhone 1-5 or a successful tablet computer 10 years ago? The same thing goes for Google, which IPOed at $100 per share only to soar to $875 since 2004? Who would have thought a search engine company would later develop a driverless car or a computer the size of eyeglass frames? There are plenty of loser companies that looked like a “sure bet,” too. Best Buy looked exceptional as a retailer a few years ago. Who would have thought Borders was headed for bankruptcy? Or Gamestop, Sears, Kmart? Or that Yahoo would have fizzled out while Google came out on top? Unless you can see the future, it makes no sense to invest in that future.
  3. Doesn’t watch the stock price – A stock price only matters at two points: when you buy, and when you sell. In between the day you buy a stock and the day you sell it, the price really doesn’t matter. Yet, unsuccessful investors are very willing to add more money to a rising stock and pull money from a falling stock. If you believe in your analysis, and you think long-term, what the market does from day to day is not important to how you value a particular investment. Successful investors invest more when the market is falling, and find better ideas when a stock is rising.
  4. Assumes nothing – Many businesses do something that few people know about. Altria (formerly Philip Morris USA) has a future that is hinged on its large alcohol holdings. Mariott owns only about 2% of the hotels with its name on them; the other 98% are simply managed by Mariott or owned by franchisees. Visa and MasterCard do not loan a single dollar to their cardholders. General Electric’s earnings are influenced more by lending than the manufacture of light bulbs or wind turbines. Assuming that you know the business without careful analysis is very dangerous because so few companies are what they appear to be to consumers. It’s very easy to conclude that Altria is pure tobacco, Mariott is a real estate company, Visa and MasterCard are credit card lenders and General Electric is a manufacturing business, when most of these assumptions are patently false.

Time, patience, and perseverance

You can simplify the traits of successful investors into three items. Successful investors put in copious time and energy to find good ideas, and have the patience to wait them out. They can also persevere through poor short-term performance and the opinions of others knowing that they’ll be proven right eventually.

It’s not easy to be a very successful investor, which is why there are so few of them. Those who are successful decade after decade have common traits that set them apart from most of the investing community.

What do you think separates successful investors from the unsuccessful?

13 Responses to Traits of a Successful Investor

  1. krantcents says:

    Good Points! When I started investing I was thinking of a fifty (50) year horizon. First I wanted m y money to last that long, but also O wanted it to grow over the same period. Compared to most people, that is a very long term look at investing. I think it has done well for me.

  2. I would also like to put takes profit as well. I really enjoy the points that you make but you have to also remember that having a long term investment strategy means the possibility of highs and lows. I take profit when I can and buy on the dip to increase my positions at a lower cost. Over time that has really help me make more money.

  3. nice! I totally agree that when it comes to investing one must not just assume. An investor must make it a point to do research thoroughly.

  4. It’s important to have knowledge about what you are investing. If you don’t know a thing of two about it, you can end up losing your money. I agree with time, patience, and perseverance. These are the signs of a good an successful investor.

  5. [...] Traits of a Successful Investor – What do the world’s most famous investors have in common? It’s not just luck! This post from 20′s Finances has tips to think like a successful investor. [...]

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  9. Gold Price says:

    If Heinz continues to be anywhere near as successful as Buffett’s past investments, Berkshire shareholders should be quite happy. For nearly four decades now, Buffett has been generating returns north of 20% for Berkshire, one of the greatest investment track records ever. Anyone who believes that you can’t beat the market over the long haul need only look at his track record — and, as Buffett himself has noted, the track records of his old colleagues. In a 1984 speech he gave at Columbia University entitled “The Superinvestors of Graham-and-Doddsville”, Buffett examined the remarkable track records of a small group of investors who studied under Benjamin Graham, the man known as “The Father of Value Investing”. He explained that from 1954 to 1956, there were four “peasant level” employees working under Graham at the Graham-Newman Corporation (David Dodd and Jerome Newman were among the firm’s other directors). Three of those “peasants” (Walter Schloss, Tom Knapp, and Buffett himself) established easily traceable track records after leaving the firm, Buffett said — and all of those track records were tremendous.

  10. If Heinz continues to be anywhere near as successful as Buffett’s past investments, Berkshire shareholders should be quite happy. For nearly four decades now, Buffett has been generating returns north of 20% for Berkshire, one of the greatest investment track records ever. Anyone who believes that you can’t beat the market over the long haul need only look at his track record — and, as Buffett himself has noted, the track records of his old colleagues. In a 1984 speech he gave at Columbia University entitled “The Superinvestors of Graham-and-Doddsville”, Buffett examined the remarkable track records of a small group of investors who studied under Benjamin Graham, the man known as “The Father of Value Investing”. He explained that from 1954 to 1956, there were four “peasant level” employees working under Graham at the Graham-Newman Corporation (David Dodd and Jerome Newman were among the firm’s other directors). Three of those “peasants” (Walter Schloss, Tom Knapp, and Buffett himself) established easily traceable track records after leaving the firm, Buffett said — and all of those track records were tremendous.

  11. Ronald W. Chan explores the strategies of 12 highly successful investors from around the globe in The Value Investors: Lessons from the World’s Top Fund Managers. Chan is the founder of Chartwell Capital Limited, an investment management company based in Hong Kong. He is a frequent commentator and contributor in the financial press and the author of Behind the Berkshire Hathaway Curtain: Lessons from Warren Buffett’s Top Business Leaders .

  12. 5. MICHAEL STEINHARDT Michael Steinhardt is one of the most successful investors in the history of Wall Street and also widely known for his philanthropic activities, particularly in the Jewish community.

  13. That investors’ preference for China after WTO accession increased was apparent from the annual survey that Japan’s Bank of International Cooperation (JBIC) conducts among large Japanese firms and TNCs. One question asked respondents to indicate in order of preference their 10 most-favored countries for locating manufacturing industries. Between 2000 and 2001, the proportion of large Japanese firms and TNCs naming China increased from 65 to 82 per cent. Concurrently, mention of ASEAN economies steadily declined between 1996 and 2000. Also, the gap between China and the US, in terms of favorite destinations for FDI, improved in China’s favor. Ranked first and second, respectively, in 2000 and 2001 by the Japanese firms, this ratio was 65:41 in 2000, while in 2001 it became 82:32. That is, the gap widened from 24 to 50 percentage points, assigning China a higher position on their scale ( Woo, 2004 ).

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