There are plenty of good investors around. Have you ever wondered what makes them so good? Stick around, you are about to find out.
Here is how is that going to work- I will list all the characteristics that are important to be a good investor. I will also point out some example, so you can get a better idea.
Before we start you can check out the metrics section if there is something you don’t understand.
1. Patience
First and foremost, an investor needs patience. Investing is a long-term game. But why, you may ask? Well, because markets tend to be volatile in the short-term. Let’s take a look at a couple of examples.
So let’s say the year is 2011 and you have seen that Netflix is making a push into streaming. You like the idea, so you buy the stock. Everything is well and good. Let’s take a look at the Netflix chart.
If you look at the overall chart it looks great- nice uptick to the far right- just what you want to see. But as you can see if you bought in 2011 you would have actually lost money for the next 2-3 years. Is there anything wrong with the stock? No, not at all, it’s just that the stock has been underperforming in this period.
But what else can you see here? Yes, that’s right- if you are patient the stock does go back up and you would have made a very good return on this investment. So there are two possibilities here. Number one- you panic, sell at the bottom and then kick yourself for missing out on the coming gains.
Number two- you keep the stock, maybe even buy a bit more and you make all that profit in the upcoming years.
And what’s the difference between those two? In the first scenario you don’t have the patience, in the second one you do.
As I said- investing is a long-term game. There are multiple scenarios, where you are going to lose money on paper for years. In fact you can look at that exact same graph in the years before 2005. As you can see the stock is pretty much flat from around 2002 to around 2006.
But things work out if you are patient and just leave the stock alone. If you want to make long-term return you need to think long-term. Hope you now understand that patience is a really important trait in a long-term investor.
2. Strategy
First you might want to check out the different investing strategies. Now here is the important part- you need to pick one for yourself and stick to it. In order to do this you need to have learned your lesson from point 1- be patient. Pick a strategy that suits you, stick with it and you are on the right track.
To be easier to understand I will show you an example. We are going to take a look at the Magellan fund’s performance in the last century. For those of you not familiar- the Magellan fund was operated by Peter Lynch at that time.
He is the most successful investor in history with an average returns of 29.2% annually during his 13 years at the Magellan Fund. For those of you who are not sure how good is that- the markets return around 7-8% on average. Let’s see how this looks like on a graph.
So what was his big secret? Well the biggest secret was his systematic investing approach. Or in other words- he had a strategy and he kept it during his entire investing career. He kept investing in the sectors he knew and he did that year after year.
If you want to learn more about him I recommend you reading One Up on Wall Street or Beating the Street. They are both written very well and are not as dry as your usual investing books.
He followed his own strategy and you can see how did that affect his performance. He didn’t panic sell, neither did he panic buy. Which brings me to the next point in being a good investor.
3. Independent Thinking
But what that does mean? That means that you need to think for yourself. In the finance world there is information. A lot of information. Perhaps too much information.
You have people recommending stocks, funds, ETFs, different positions, different instruments. You have people saying the market is going up. You have people saying the market is going down. You have analysts, forecasters, all kinds of planners, strategists and whatever other position there is, you get the point.
The problem is that people get confused with all that information. You see people recommending stuff every day. One tells you to buy, another one tells you to sell. Another tells you that this stock is “The next big thing”. So what happens in the end- you get sucked into this whirlwind of information, you get confused, you lose all your money and you decide that the stock market is manipulated.
But here is the thing- it’s not the stock market that is manipulated(well to an extent, at least), it’s you that are getting manipulated. When you listen to all those people and their different opinions you lose track of what’s going on. You let them be in control and in the end you lose everything you had.
So what’s the solution to this? It’s actually very simple- stop listening to all those people, who have something to say about the stock market. Now, don’t get me wrong- there are some brilliant interviews and documentaries that I actually encourage you to watch. But try to not overfill your mind with too much opinions.
Also avoid buying a stock, just because someone is recommending it. No one knows what to buy better than you. The only thing you need to do is put a little bit of work, choose a strategy that fits you and follow it. Ignore all the outside noise and you will do well.
This point came off as bit of a rant, but there are too many people that do the same mistakes over and over again. They subscribe to different programs with ‘’The magic stock market formula” and wait for some stock market guru to tell them what “The next big thing” is.
I am telling you that, because I care about you. That’s why you will not see me pushing stocks, subscriptions or magic formulas to you. Investing can be simple and you can make steady returns without listening to strangers and their secret formulas.
If there is one thing you learn from this article I hope it’s this- pick your own strategy and follow it. If you need help I have plenty of articles that will guide you and give you a good base, so you can build your own portfolio. You can also check all the books I recommend in my resources section. And all you need to do is sit down for a bit and learn it.
All right, I hope you get the point. Now let’s take a look at a little example of successful independent thinking.
Warren Buffett
For those of you that don’t know him- Warren Buffett is the chairman of Berkshire Hathaway and in the top 3 richest people in the world. He achieved this by compounding his wealth over and over again by over 20% every year.
But why is that relevant? Well, because Warren Buffett always had his own strategy and has kept it for decades. He never lets people influence his decisions. Here is an interesting graph I want you to see.
He has a very good saying- “Be fearful when other are greedy and greedy when others are fearful”. As you can see such is the case in the end of the 90s and beginning of the 21st century.
It was back then when everyone was crazy on tech stocks. Warren Buffett has never really understood them, so he stayed away from them. He didn’t let pressure get to him. Of course he has taken a lot of critiques, because he is missing one of the biggest rallies in history. But he stuck to his guns and as you can see in the end he outperformed the markets in the next two decades.
Hope you now understand the importance of having independent thinking. In fact not only in the stock market, but in most areas of life.
4. Long-Term Mindset
This coincides with my first point- you need to be patient. Let’s take a look at that same Netflix graph again.
As you can see this is one of the best-performing stocks in this century. Great, right? Well, yes, but what if I tell you that a lot of people have actually lost money with it? That’s right, and that’s mostly because people are having trouble just leaving the short-term fluctuations to the speculators.
Speculators are people that bet on short-term market price fluctuations. People sometimes mix investors and speculators together, but they are the exact opposite. Speculators count on short-term market fluctuations. Investors count on long-term financial performance.
But as they are both participating in the same market, sometimes investors forget about the long-term, and act as speculators.
This leads to panic selling and buying different companies, and therefore making mistakes.
Both of those are caused by either greed or fear- two things you should not be lead by. Greed can happen in two forms- you either see a company going up and up and you buy it, just to see the stock going down later.
There are countless examples of that- tech stocks in the late 90s, bank stocks in the financial crisis, crypto currencies 2 years ago, cannabis stocks recently and so on.
Why does that happen?
Well, because people see the prices jumping every day and they want in. That decision is mostly caused by greed. Then when the price starts going down you are in no man’s land. You don’t know what to do with the stock and you end up panic selling.
Which is also caused by the other factor you need to try and ignore- fear. This causes you to panic sell your stocks. But it also causes you to panic buy. This is called fear of missing out, or FOMO. It acts in the same way as greed- you see prices go up and you are afraid you are going to miss out on the gravy train.
How to Avoid Emotions in The Stock Market
You can avoid being part of all that speculation by picking a solid long-term companies that you believe in. But how do you do that?
I will explain. First you build a watchlist with all the companies/ETFs that you like and think will do well in the future. At this step the valuation doesn’t matter- just pick all the companies that you like.
After you do this it’s time to do some research and decide how much are you willing to pay for a given company/ETF.
Then you wait until the company you like reaches the prices you like. Then you buy shares in that company and you leave them alone. Of course you should still follow their earnings reports and watch how the company evolves over time.
But after you have done all that research and have picked the company yourself, you will have a totally different view.
I have found that I am much more confident in such stock picks and I don’t let short-term fluctuations bother me. In fact in most cases short-term fluctuations are actually welcome, because that gives me chance to buy more. I hope you understand what a difference that makes.
5. Common Sense
Last, but not least you need to have common sense to be a successful investor. There are a couple of areas where people really throw their common sense out the window.
First one is by chasing high dividend yields. And by high I mean 10, even 20% dividend yield stocks. When you look at their balance sheets you see that their payout ratio is 200,300% and even more.
Payout ratio means what % of their earnings is the company giving out to pay dividends. So if the company is giving away 3 times their earnings what do you think will happen? If you have common sense you would guess that either the company is going to go under or they will have to slash their dividend.
There are countless such examples that you really need to use your common sense. Another one on top of my head- don’t invest your entire portfolio in start-ups. Nothing wrong with investing in those of course. But make sure you are careful as start-ups are way more risky and you have no guarantees.
Another ones can be investing your entire portfolio in a single stock, investing your entire portfolio in a single sector and so on. All of those things might seem silly, but people often makes those mistakes.
So if there is one thing I want you to take away from this point- make sure you inject some logic before you buy a new position. Just ask yourself a couple of questions. Why are you buying the stock? What do you expect from this stock? When would you sell the stock? When would you buy more of the stock?
This is an easy exercise before buying or selling a stock of yours. It takes a couple of minutes, but it can save you a lot of headaches down the line.
Summary
Overall investing is not that hard. What is hard is the mental part of it. But it all comes with experience. Everyone inevitably makes mistakes, but the important thing is to learn from them. I have made mistakes, you will make mistakes and everyone else will.
I want you to remember one thing- make sure you make your own decisions. Question everything you do and you will inevitably learn and eventually do well. For some people it might take more time, for some people might be less. But everyone can figure this out, as long as they think and understand what are they doing right and what wrong.
That will be all from me , hope you learned something. If there is something you don’t understand don’t hesitate to drop me a comment. I will make sure I get back to you as soon as possible. Thank you all, wish you all the best and stay safe.