What makes for a good investor?
Over the years, I’ve seen good investors, and bad investors. And an awful lot of average investors.
From the privileged position of being a Motley Fool columnist, I’ve even been able to interview some of the good investors — investors such as Anthony Bolton, Burton Malkiel, and Charles Ellis.
And if you’re reading this, Warren, the offer’s still open.
But what is it that differentiates a good investor from an average investor? Or a bad investor?
Some quite simple things, actually.
Good investors have a strategy
We’ve all seen them. “Magpie” investors that just pick up shares on a whim — a Sunday newspaper tip, a share that someone from the golf club recommended, a supposedly hot initial public offering, and so on.
There’s usually not much more to say about the resulting mess except to note the fact that it is, well, a mess.
Better by far to have a strategy. And even better to stick to it.
What might such a strategy be?
Investing in growth shares might be one such strategy. Investing for income might be another. Investing for global diversification might be another. Investing in resources and energy shares might be another.
And so on, and so on.
Good investors choose metrics that match their strategy
How are your shares doing? Ask this, and you’ll hear some awful answers.
“Dog Star Dynadrive is up 80%!” they’ll gush. Yes, but all your other shares are down 10%.
“Not so good: the dividends are really, really poor.” But what do you expect? You’re invested in growth shares. Some of your shares don’t even pay a dividend.
“The market seems very volatile at the moment.” I’m not surprised: you’re only invested in three shares.
“My portfolio is up 30%!” Yes, but over the same period, the market is up 40%.
And so on, and so on.
If you’re pursuing income, measure — and report on — income. If you’re pursuing growth, measure — and report on — that growth. If you’re only investing in oil shares, measure yourself against the overall oil sector.
And measure yourself against the market, or against a relevant sub-sector of the market. Simply being ‘up’ is not good enough: are you beating the market, and by a reasonable amount? Otherwise, a cheap — and probably better diversified — index tracker might serve you better.
The same with income: are you getting more — or less — income than you might with a reasonably low-cost investment trust, such as (say) City of London Investment Trust?
Good investors are opportunistic
Warren Buffett summed it up best: in the long term, the market is a weighing machine — but in the short term, it’s a voting machine.
Meaning that individual shares — or market sectors, or even whole markets — go in and out of fashion, and experience buoyant conditions, or not so buoyant conditions.
So when shares go ‘on sale’, these investors are prepared to buy. It might mean some short-term pain — and often does, in my experience — but market conditions, and market opinion, eventually change.
Leaving investors sitting on assets bought at attractive prices, and income streams larger than they would otherwise be. I’ve noted before my opportunistic purchases of Shell: £12.95 in 2016, and £13.40 in March 2020. They’re now over £28. And let’s not even mention the dividends.
Good investors invest for the long term
Good investors — as opposed to traders — are in it for the long term.
They understand that investing returns compound over time. They understand that timing the market is very, very difficult, and that it’s often better just to take a long-term view. And they understand that it’s perfectly natural for the market to go up and down, and that it’s better to simply ride out such fluctuations.
They don’t expect to get rich by next Wednesday. They don’t panic and sell out when the market turns down. And — wherever possible — they buy shares that are able to withstand economic downturns and adverse conditions.
How long is ‘long term’? Longer than five years. 10 or 15, at a minimum. And because they’re investing with long-term goals in mind — retirement, or early retirement, say — they’re sanguine about an investment horizon of 20+ years.
So there we have it
Do you recognise yourself in the above? Perhaps not.
But would you like to recognise yourself in the above?
You know where to start.
