Every Investor wants to become successful. We can become successful investors and can beat market by few points every year. We can learn to outperform through our hard work, above average IQ, experience and reading, having an MBA is an added advantage. These things are necessary to become great investor, but in and of themselves aren’t enough because all of them can be duplicated by others. That’s why only less than 1% people with above qualities can actually become great investor.
Reading is extremely important, but it won’t give you added advantage over others. Everyone reads a lot in this business. Reading helps you to keep up. It’s not necessary to have correlation between your portfolio performance and number of books you read. Once you reach a certain knowledge point, there are diminishing to reading more. In fact, reading too much news can actually be detrimental to performance because you start to believe crap news.
MBA is just a way to learn how to exactly, precisely, equal the market return. You can reduce the tracking errors dramatically by getting an MBA. But you can’t become great investor by having MBA from top business school because lessons of great investing can be taught.
Experience is another over-rated thing. It’s incredibly important, but can’t be source of competitive advantage over others. It’s just another thing that is just required for admission. At some point the value of experience reaches the point of diminishing returns. If that’s was not true, all the money managers would have their best years in their 60s and 70s and 80s, and we know that’s not true.
So what are those competitive advantages that great investors have? For a company, if their competitors know their secret and yet can’t copy it, that’s a structural advantage. That’s called moat. Similarly, great investors possess moat or traits that can’t be duplicated unless you have them hard wired into your brain at childhood. It is very difficult to possess them in adulthood. These traits have nothing to do with your IQ, qualification, experience or knowledge. They have to do with your psychology and behavior. Well, there are at least seven traits great investors have.
Trait #1 is ability to buy stocks while others are panicking and sell stocks while others are euphoric. It sounds very simple, but when market is crashing, almost no one has courage to buy. When marker is going up every day, you can’t bring yourself to sell because if you do so, you think you will fall behind others.
Trait #2 is obsessive about playing game and wanting to win. Great investors don’t just enjoy investing, they live it. They wake up in the morning and first thing they think about is a stock they have been researching or one of the stock they are thinking about selling, or what the greatest risk to their portfolio is and how they are going to neutralize that risk. Their head is always in cloud and dreaming stocks.
Trait #3 is willingness to learn from past mistakes. The thing that is so hard for people and what sets great investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them. Most people would just move on ignore the dumb things they have done in the past. If you ignore mistakes without fully analyzing them, you will undoubtedly make a similar mistake later in your career. And in fact, even if you analyze them it’s tough to avoid repeating the same mistake.
Trait #4 is inherence sense of risk based on common sense. Common sense is the great risk control. Great investors control risk using common sense not by computer models.
Trait #5 is confidence in own conviction. Great investors have extreme confidence on their own conviction and stick with them, even when facing criticism. Buffet never gets into the dot-com mania though he was criticized publicly for ignoring technology stocks when they were booming. Instead putting 20% of portfolio into a stock, investors with low conviction will put only 2% into it. 2% position is equivalent of betting on a stock that has only 51% chance of going up. Why would you waste your time even making that bet?
Trait #6, it’s important to have both sides of your brain working, not just the left side (the side that’s good at math and organization). Smart people have only one side of their brains working, and that is enough to do well in the world but not enough to be an entrepreneurial investor who thinks differently from masses. On the other hand, if your right side of brain is dominant, you probably loath math and therefore, you don’t often find these people in world of finance to begin with. As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such a judging a management team from subtle cues they give off.
Trait #7, the most important and rarest trait of all is the ability to live though volatility without changing your investment thought process. This is almost impossible for most people to do. People don’t like short-term pain even if it would result in better long-term results. Very few investors can handle the volatility required for high portfolio returns. Risk is that if you wrong about a bet you make, you lose money. A swing up or down over a relatively short time period is not a loss and therefore not a risk unless you are prone to panicking at the bottom and locking in losses.
Courtney: Gist of Mark Sellers talk at Boston business school
Submitted April 16, 2016 at 12:24AM by equitywisdom http://ift.tt/1qNjkSK
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