What are some of the most common traits of great investors? Measuring their average total return over a long period of time is a clear and obvious way of separating the average investor from the great ones, but what are the traits that all of these successful individuals have in common?
Today we will explore 6 of them in no particular order. This is not an exhaustive list, but it gives you a good idea of the traits of some of the most successful investors out there.
You should also consider using this as a reflection of yourself when investing, and what you can do to improve your approach to it to become better than you were yesterday.
You don’t trade on emotion
This is probably the most common fault of investors and one of the hardest to overcome. Letting your emotions get the better of you is sure-fire way to lose money fast. If you’re constantly looking at your profit and loss, watching some of your stocks fall into the red and worrying about what could happen tomorrow, next week or next month, investing on emotion can quickly turn into trading for a loss.
Sure, sometimes it sucks to see your investments go the other way, but that’s part of investing. If you have done your research on a company, stock or investment and you have a high conviction in it, you’re able to look at it more objectively and leave your emotions to one side. How many times have you sold a stock at a loss only just to see it rebound and move higher again?
The same can be said for buying a stock on emotion. If you find yourself getting caught up in the euphoria of a momentum play you could end up with a terrible entry point, potentially even buying right before a stock reverts to the mean trendline.
Investing shouldn’t be guided by your emotions, if you can separate them from cold, hard facts and objective truth, you can make better decisions that ultimately translate into higher returns.
You are patient
The second sign of a great investor is demonstrating patience. You understand that the true returns are seen in the long run. Chasing short-term profits and flipping assets for pennies requires a large amount of luck and most importantly, a high success rate.
You have to be right far more often that not on short-term movements and in all honesty, it’s impossible to accurately predict many times in a row what a stock will do in 1 hour, day or even week. This is the hard truth that many investors learn when they look to day trading as a ‘get rich quick’ scheme.
Investing in high quality companies over a long period of time and reinvesting your returns is a great way to generate lifetime wealth. Having the patience to wait for it can be tough, especially when you want to cash out on quick gains to buy the latest and greatest piece of tech or spend all your gains on another summer vacation. Patience is a virtue and resisting the urge to meddle with your portfolio can lead to massive returns in the future.
You aren’t chasing ‘hype’
The third sign of a great investor is that you’re not trying to chase the latest hype or jump on the bandwagon of the latest and greatest momentum stock. You stick to your core competence and invest rather than speculate.
Sure, it might be a bit disconcerting at times to spend hours researching your investments and see low double-digit growth year-on-year when compared to investing in a meme coin which 10Xs in a month, but that is not investing, that’s speculating, and speculating in a momentum stock is only great until it suddenly isn’t.
Treating the stock market as your own personal casino is no better than gambling at the roulette table. While some may get lucky, others wipe out their entire investment accounts overnight. You only have to look as far as the investing subreddits to see the monumental losses some people have incurred trying to chase momentum.
You manage risk
You know when to cut your losses and move on. It can be hard to admit that your investment thesis didn’t work out as you had thought, but no investor gets it right 100% of the time. Averaging down to a losing position in the hopes of breaking even can lead to compounding losses, a quick way to destroy your portfolio.
If a stock falls with no fundamental change to the underlying business, then this can provide a good entry point at a discount, but if news breaks of a structural change to the business and the stock falls as a result of that news, then we have to take a step back and reassess.
Unilever is a great example of this. Their recent quarterly earnings were not the best to say the least, and they also pointed to a reduction in operating margins due to inflationary pressures. If margins continue to fall, Unilever have less profit with which to distribute dividends to shareholders.
If they cannot cover their growing dividend payment solely through profits, they will either have to take on debt to continue paying and growing their dividend or cut it.
As a popular income stock for dividend investors, we now have to make a decision as to whether our money is best placed in a company facing tough conditions such as Unilever or invest elsewhere where we feel our dividend is more secure.
You are constantly learning
The continual pursuit of knowledge and improvement. You are constantly researching opportunities and learning to become a better investor. Great investors continue to improve their investment approach and are open to new ideas and perspectives. The moment you begin to rest on your laurels and think that you have it all figured out, your portfolio is at risk of stagnating and even underperforming.
If a new research note or analysis on a stock is released that may contradict one’s investment thesis, a great investor will take the opposing viewpoint into careful consideration, weigh it up against their own thought process and come to a balanced and measured conclusion.
This ties in with point one and investing on emotion. A person with emotion at the forefront of their investment decisions will simply dismiss the contradictory idea as nonsense and continue tunnel visioning in on their own ideas, which can prove to be costly. In the process, you may miss out on some vital information that could help you preserve the value of your portfolio.
As well as this, a great investor will continue to analyse the market for potential new investments even if theirs are performing relatively well. Investors who continually look for the optimum area to allocate their capital are able to drive above-average returns. Not all stocks perform equally well in every situation. You may want to prefer financials or energy in a high inflationary environment.
Conversely, if the market turns sour you will want to seek shelter in defensive stocks such as consumer staples or healthcare. There is not a ‘one size fits all’ approach to investing, and great investors learn how to navigate these situations over time through the continual pursuit of knowledge and improvement.
If you want inspiration on what you could be reading to further your development, you can find my recommended reading list here.
You have a practiced approach to investing
You follow a structured and comprehensive investment process repeatedly when looking to allocate capital to an investment. What exactly does this mean? Simply put, you don’t jump into a position and worry about the research later. “Wow, this stock has fallen 30% today, I need to buy the dip for a quick swing trade and find out why it’s dropped so much later on.” This is a much more common approach to ‘investing’ than you may think.
Social media and investing apps make this ‘reflex investing’ commonplace among retail traders looking to be opportunistic in the market. One of the worst decisions a retail trader can make is to invest in a falling knife because it is trending on Stocktwits or Reddit.
A great investor is much more measured in their approach and will follow a structured investment process. This could be in the form of a checklist to see if the stock meets all or most of the criteria before investing. If you don’t have a checklist of key items to look for in a stock I would highly suggest doing so.
Think carefully about the key things you want out of a business when putting your money into it. Is it a healthy and stable dividend, high year-on-year revenue growth or new market penetration? Whatever it may be, write it down and use it as a starting point when researching potential investments.
If you’re looking for some inspiration, I have made a video on how to analyse a potential dividend stock investment, where I walk you through how I research my potential investments when looking for an income stock. I’ll leave a link to that below.
