Warren Buffett, George Soros and Peter Lynch are all incredibly successful investors. But all of them had humble beginnings. So what exactly makes these investors the cream of the crop? In this article, we look specifically at the 5 essential traits that highly successful investors have in common.
The first common ground that successful investors share is that they all continuously expand and stay within their circle of competence. This might sound a bit contradictory at first, but the concept is relatively simple – when investing, simply stick to what you know and understand, but be extremely proactive to expand the breath and depth of your knowledge.
As investors, we all have our own ‘circle of competence’. We all have accumulated knowledge through everyday experience, work, and study. Knowledge that would be highly useful in evaluating both quantitatively and qualitatively the health and future prospects of a business. It is precisely this knowledge that would enable us to make smart investment decisions.
For example, chances are you know exactly how a restaurant operates and very little about Uranium mining. Chances are you can more accurately pick winners from the fast food sector than the Uranium mining sector. Stick within your circle of competence will ensure that you make less mistakes. Expanding your circle of competence on the other hand, will enable you to spot more opportunities. After all, every stock is essentially a business. The more you understand that business, the better your investment decisions.
The basic story remains simple and never-ending. Stocks aren’t lottery tickets. There’s a company attached to every share.
~ Peter Lynch
You’ve probably heard that investing is a long-term game. More specifically, it is about having the inner confidence to see your investment strategy come to fruition. Investment is about selecting and buying assets that provide income and/or capital growth over time. It is not something that you do for a quick overnight profit.
In this day and age, we’re bombarded with exaggerated and sensationalised market news every day. It is therefore very easy to over-react and make poor investment decisions based on short-term sentiment. You might have a well-devised strategy, but when that strategy doesn’t provide you with a return in 3 months, there’ll be temptation to not follow through. The lack of required patience is one of the main reasons why most people lose money on the stock market – they’re in the game to speculate, not to invest!
I never attempt to make money on the stock market. I buy on assumption they could close the market the next day and not re-open it for five years.
~ Warren Buffett
All successful investors have a good understand of the intrinsic value of their investments. This is the question of how much a business is really worth as opposed to how much the ‘market’ thinks it’s worth. Market sentiments vary from day to day, but a good business does not become a bad business overnight. Thinking in terms of ‘value’ is not only logical, but it will ensure that you don’t pay over the odds and make money long term.
In order to identify the ‘intrinsic value’ of a business or asset, you have to analyse its fundamentals. This would include a complete analysis of a company’s earnings, assets, debts, cashflows, past performance and projected future performance. Having a deep knowledge of fundamentals will help you determine what the business is truly worth.
While the value of a company is rooted in logic, the market on the other hand, is often highly illogical. The market as a whole is driven by panic, euphoria, apathy and over-reactions. Successful investors identify the discrepancy between a company’s real intrinsic value and the market’s perceived value and capitalises upon these opportunities to buy good businesses for a good price. All successful investors use the market to their advantage. While unsuccessful investors allow the market to dictate and influence their decisions.
The true investor is in that very position when he owns a listed common stock. He can take advantage of the daily market price or leave it alone, as dictated by his own judgment and inclination
Successful investors believe that there is no such thing as a natural born investors. Like most areas in life, success comes with continuous deliberate practice. So what are the skills that you need to focus on? The truth is, all the math you need in the stock market should already in learned by fourth grade. As such, the skills required may be not difficult, but the continuous application of those skills will be hard.
Successful investors are masters at evaluating investment opportunities from both a quantitative and qualitative standpoint. Investing is therefore partially a science and partially an art. Quantitatively, the investors assess and analyse the facts and figures related to that business. While qualitatively, the investor considers other intangibles such as brand equity, competitive advantages and putting the facts and figures into the context of current market conditions. The process of identifying, analysing and selecting stocks as a skill which would take many years to refine. Deliberate practice is therefore crucial to an investor’s success.
Having the knowledge, patience and skills means that you’re almost there. Finally, all highly successful investors must exercise a high degree of emotional control, laser-like focus and discipline. Investing is not for people hoping to turn a quick profit, nor is it similar to gambling. Successful investors distinguish between investment and speculation.
By far the most difficult trait or skill to develop is the emotional discipline to succeed. Sticking to your investing strategy whether you are winning or losing requires a great deal of emotional control. The biggest difference between a successful investor and an average one is an average investor will jump around from strategy to strategy with the hope of getting the next ‘hot’ tip.
The men who have succeeded are men who have chosen one line and stuck to it.
~ Andrew Carnegie
None of the ‘legends’ of the investment world possess any superhuman powers. However, their successes can be attributed to the aforementioned qualities or traits. Master them, and you can have your own successes in the never-ending game of long term investing.
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