The best investors throughout history have all shared some common traits. You won’t be able to implement the exact strategies as Buffett or Graham. But what you can do is implement their behaviors and beliefs into your own personal investing strategy.
There is a difference between traders and investors. Successful traders can get one trade right and then make a living by going on CNBC to make predictions about short term market movements.
Investors aren’t swayed by short-term market movements. They pay attention to them but they focus more on the long-term value of companies’ earnings. Investors are more concerned with systematically growing their money over the course of decades.
There are similarities between the two, of course. But we’ll be focusing on the traits of investors in this blog post.
The Best Investors Share These Traits
They Know Their Temperament
An investor will experience every type of market during their lifetime. Up, down, sideways, boring, volatile, and everything in between.
Unfortunately for investors, the only real way to find out your true temperament is by having skin in the game i.e money at risk. It’s impossible to simulate the feelings associated with making and losing money in the stock market.
The key is to pay attention and understand your reactions throughout the different market cycles.
Do you get overly confident when the market is up? Has this overconfidence led to excessive risk taking?
Do you get extremely worried when the market is down? Has that fear driven you to act?
Are you more contrarian, and view bad markets as buying opportunities?
Do you like to check your accounts everyday? Or do you like to check less frequently?
Knowing your investing temperament is crucial because it allows you to design safeguards and rules to help you make the right decisions and stay on track in all market environments.
Take the Appropriate Amount of Risk
This step goes hand-in-hand with knowing your temperament. Often times, folks get worried about their investments because they are not taking the appropriate amount of risk. They over expose themselves to the fluid nature of the markets.
Money needed in the next 12 months should not be at risk in the market. Money that has an unknown date for when it is needed should probably not be at risk in the market.
The market moves, that’s just what it does. If you need X amount of dollars by Y date, that money belongs in a savings account, not an investment account.
When risk tolerance and time horizon line up, it becomes easier to focus on the long-term.
You don’t have to sweat not being able to pay the bills because short term money is not at risk. Long-term money is allowed to continue to grow because you know you won’t need it for several years.
Over a day, week, month, or even a year, what the market does is anybody’s best guess.
But, when the time horizon is zoomed out to 5 years, 10 years, 30 years the odds begin to work in your favor.
This is because when you are a long-term investor, you are betting on the ingenuity of the human race. You are betting on capitalism. You are betting on the best companies’ ability to make money. You are betting on new companies being created by the up and coming youth.
This doesn’t mean we always have to be upbeat and positive about the market, economy or individual companies.
The realistic part is equally as important as the optimistic part.
The realistic part is the part of successful investors that knows they will suffer losses in the short term on occasion. The realistic part is the part that understands the market does not return a smooth 7-10% per year. The realistic part is the part that understands the relationship between risk and reward. It understands that enduring risk is the only proven way to reap rewards.
There are NO GUARANTEES when it comes to investing. Yet being able to maintain realistic optimism is one of THE KEY traits all successful investors have in common.
All of the best and worst markets are baked into the numbers in the graphic above. We know that investors don’t want to be told to keep things in perspective when they’re losing money. But our job is NOT to tell people what they want to hear.
2022 has been one of the most difficult investing environments in recent memory. In a recent podcast, we talked about how it’s important to not invest on the exception and rather invest based on the rule. While there a few rules in investing, one of those rules is that you are rewarded for taking on risk over the long-term. The chart below from Ben Carlson shows exactly that.
We know that the market is in rough shape right now. And we know that it will go through rough stretches again in the future. But it’s important to keep things in perspective and not over react in the short-term.
Compound interest is said to be the 8th wonder of the world. Investors need perspective in order to not interrupt the compounding of their investments.
Learn From Mistakes
There is no such thing as a perfect investor. Even the best make mistakes along the way. Life is going to change. Your circumstances are going to change. And your investment plan will probably change with it.
While it is important to study the past and to analyze your past behaviors in different market environments, it’s equally important to not be blinded by hindsight. Everything looks obvious when looking out the rearview mirror.
It’s a balancing act between learning from your mistakes in hopes of not making them again, and knowing that you can’t avoid every uncomfortable dip in the market.
If you haven’t noticed these tips aren’t about the best trading strategies or how to use complex options to get rich quick. Good, sound investing does not involve getting rich quick. It involves having conviction in your plan and making adjustments along the way.