QUALIPORT
How To Be A Successful Investor

By Maynard Paton (TMFMayn)
June 12, 2003

Every stock market connoisseur should have The Investor's Anthology on their bookshelf. It's a compilation of "original ideas from the investment industry's greatest minds". Alongside the familiar names of Buffett, Fisher, Keynes and Graham, the book's other contributors include T. Price Rowe, John Burr Williams, George Ross Goobey and Philip Carret.

However, one of the best chapters comes from Douglas Bellemore, a New York lecturer and author of the little-known book, The Strategic Investor, published in 1963. The feature concerns the personal characteristics required to succeed on the stock market, a subject not generally covered by most investment gurus.

Bellemore writes: "Not all investors have the innate or acquired personal characteristics that are mandatory to succeed in building a portfolio of common stocks that will significantly outperform the market over the years. What are the traits required for success as aggressive investors?"

He outlines these five points:

1. Patience. The aggressive investor should not expect quick results although occasionally this occurs. Success depends, in large measure, on the ability to select undervalued situations not presently recognised by the majority of investors and to wait for expected developments... that may only come after several years.

How true. Short term, a share price will move for a whole host of reasons, many of which have nothing to do with the underlying business. Long term though, the share price direction will correlate to the company's profitability.

When any business reinvests its profits, it will almost certainly take a good few years for that reinvestment to fully bear fruit. As such, if you want to get the maximum out of your quality portfolio, be prepared to hold for some considerable time.

2. Courage. The investor must have solid convictions and the courage and confidence emanating from them – that is, courage, at times, to ignore those who disagree.

There is no shortage of opinions within the stock market. However, determining whose judgments you should listen to on a regular basis is a futile task. Instead, it's far better to spend time using your own experience to form your own conclusions.

Successful investors have to go against the crowd on a regular basis. Undervalued shares almost always have a cloud of gloom hanging over them, with many experts on hand to supply a negative opinion. However, investing in visible, day-to-day businesses, whose products or services (and thus profits) are not subject to rapid change or decline, will help provide the necessary courage whenever a falling share price is 'telling you something'.

3. Intelligence. To realise success, the aggressive investor must possess average intelligence, but by no means does he need to be a genius.

In the stock market, adopting a straightforward common sense attitude is of far more importance than having great intelligence. Rather than focus on a handful of key points, many investors sadly fulfil their intellectual capacity by focusing on company trivia or byzantine stock market issues. A common sense 'big picture' view will help you from wandering aimlessly in maze of details.

Surely something as difficult as beating the stock market requires a brain-taxing, sophisticated approach? Not really. Common sense suggests the best investments tend to come from obviously good businesses bought on obviously cheap valuations. No rocket science there.

4. Emotional stability. This trait... is needed to prevent the investor from being engulfed in waves of optimism and pessimism that periodically sweep over Wall Street.

A key task for any successful investor is to separate fact from emotion. Good old human nature, creating bouts of excessive greed and fear, can become a real danger to your portfolio. However, anchoring your investment decisions to company facts will help protect you from the stock market's alluring moves.

Emotional stability will prevent overexcitement from market rises and depression from market falls. In fact, combined with a little courage (q.v.), net long-term investors should adopt a contrary philosophy, whereby they welcome market falls and despair at rises.

5. Hard work. To be successful, an aggressive investor must do thorough research, which requires considerable time and effort.

There are no short cuts to stock market glory. Even such simple tenets as 'look for obviously good businesses' require investigation and research. While a company may look attractive on the surface, evaluating cash flows, margins, return on equity and boardroom pay can be a protracted process. Keeping on top of industry developments can be a time consuming activity, too.

Snapshot company data, brokers' notes and bulletin board write-ups can sometimes provide a lot of the factual groundwork. However, you'll never know if anything untoward has been missed unless you dig thoroughly into the primary evidence yourself.

This article was first published in November 2002