The 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:
- 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.
- 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.
- 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.
- 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?