6 Things That Make A Great Investor
A good company is a well-managed one, period. That’s really all you need to know. Examples of well-managed companies are legion. Berkshire Hathaway is among the best. JPMorgan Chase is another. Apple is one just about every person can name.
But what is it that makes a company great — and brings home the bacon for investors? Frankly, it’s tough to quantify. If you’ve been investing for a while, you kind of just know it when you see it.
There’s a story that Warren Buffett received a one-page analysis that he got from Ben Graham, the father of the Value School and his mentor at Columbia University. But while he has referred to it in passing over the years, he’s never shared what’s actually on it.
Here at StreetAuthority, we’ve been looking for the secret formula to the special sauce for a long time now. And while we have yet to find the equations that support a unified theory, maybe that’s the wrong question.
The better one might be “What makes a great investor?”
We can offer some thoughts on that one. So that’s exactly what we’re going to do today…
Signs Of A Great Investor
1. A great investor is insatiably curious. The fact is, you probably don’t read enough. Most of us don’t. Great investors don’t merely read the business and financial press. They indulge a wide variety of interests with a heavy dose of breakthrough-oriented scientific inquiry. Great investors tend to be tireless intellectual explorers, willing to consider any question, play out any scenario and always keep the most vital human question — “What’s next?” — in mind.
Fortunately, we live in a world were information is just a mouse click away. There are many great business podcasts. You can purchase the great investing classics and read them on your Kindle. Check out the offerings of The Great Courses. Teach yourself to read SEC filings. Subscribe to a trade magazine; many are free.
Find interesting people who “know things” and listen as long as they talk. Challenge what you think you know. Always seek to expand your knowledge and perspective. And when you think you have things figured out, remember to look at it from the opposite perspective. Prosecute your ideas. And mark well the difference between ideas and ideals.
2. A great investor is rational. Consider your expectations for future results. The long-term total compound return of the S&P 500 is about 9% a year. Some year it will be a lot more, some less – and some a lot less. Don’t expect the market’s yearly results to be linear.
The point is, achieving a 25% gain in a year is a win. Take it.
Swinging for the fences is not a bad goal. But be realistic about your returns – and your ability to crank out winning triple-digit picks time and time again. If you seek to make 100% or 250% or more with an investment, that’s fine. Welcome to the club. But that expectation must be married to a realistic time frame. It is simply irrational to presume you can pick eight stocks in a year that are going to exceed the market by a factor of 10 in one year. That’s just reality.
3. A great investor has a plan. The general notion of “Well, I’d like to earn some money” just isn’t good enough. It’s too vague. It’s a wish, not a mission statement. What you need is a defined and detailed action plan that can be supported by empirical evidence. Identify your goal, locate your starting point, and determine your end. All that’s left is the arithmetic. Work it out. Then activate your plan, note your progress, and tweak as needed. Remember, as legendary boxer Mike Tyson once said, everybody has a plan until they get punched in the face. Be prepared to adapt as circumstances dictate.
Consider this model we discussed recently. Invest the lion’s share of your portfolio in predictable assets that will roughly mirror the market. Congratulations. Over a long enough time frame, chances are you have likely secured a 9% compound growth rate. That puts you ahead of most professional fund managers.
With the remaining portion of your of your assets (20%, for example), swing for the fences. You don’t have to capture a 10-bagger; you need to earn a 25% internal rate of return for the life of the holdings. This effectively empowers your overall portfolio to beat the market and delivers the most amount of gain at the least amount of risk.
Even though this plan is simple, it is not easy. And that brings us to the next point…
4. A great investor is disciplined and patient. Once an asset delivers that big gain you had in mind, consider getting rid of it. It has done its job. It has beaten the odds and put you in a good position to meet your overall goals.
Of all the investors we talk to, the least satisfied are the ones who invest without a plan. They buy without conviction and either refuse to hang on through tough times or refuse to let go when things are good. All of that is solved with rational expectations, good planning, discipline, and patience. Think about which of those things you’re the worst at and then dig deep to figure out what you can do to make yourself a better investor. (If this sounds like a life tip, it’s because it is. Consider it a beneficial bonus.)
5. A great investor is both results-oriented as well as process driven. You have to be able to enjoy the research, to savor the arithmetic, to rally in the face of intellectual challenge. To put it another way, if you’re not having the time of your life, call Merrill Lynch, hand them the reins and take a cruise. Find something else to do. If you’re not enjoying the hard work of investing, and it is hard work, then you may find yourself lacking in the motivation department. And when the chips are down, it’ll be that much harder to summon the resolve necessary to do what must be done.
Which brings us to the last point.
6. A great investor is grateful. If you have enough money to invest, be thankful. Act that way. A little perspective is healthy.
Much of humanity won’t ever even see a flush toilet, let alone use one. They won’t flip a switch for reliable power, they can’t turn the tap for clean water. Their children will not be born in hospitals, most likely will not be vaccinated, and will spend at least part of their lives malnourished, to say nothing of disenfranchised. Outside of the States, Europe and the urban centers of Asia, many parts of the world still face long odds against easily preventable disease.
If you live in America and you have any amount of disposable income to invest, you’ve already made it to the top 1% globally. You won the lottery just by choosing to be born in the right place at the right time. Don’t waste a lot of time jockeying for even better position. If your neighbor bought a Maserati from day-trading Tesla, good for him. Don’t engage in envy. It’s bad for the soul, and you may wind up trying to do the same thing and paying for it big time.
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