I wish I could tell you how to be a great investor. If only it was that simple.
To meet you halfway, there’s one thing I can let you in on that absolutely isn’t necessary: spending every waking hour reading books on investing. For reasons besides the fact I’d advocate living a little, lots of people have already read those books. Doing so didn’t turn every hobbyist into Peter Lynch, who between 1977 to 1990 achieved an annual average return of 29% at Fidelity Magellan.
Incidentally, Lynch wrote a classic book, One Up On Wall Street. Improving your knowledge base is important, but it’s not going to give you an edge on your competitors.
So what does?
The best investors are born, not made. Some of you reading this, I’m almost certain, have the hard-wiring to beat the market. If that’s you — and it could well be — then you’re incredibly lucky.
This is what sets you apart from the rest:
#1. You’re rational when others are irrational. When the market panics and everyone is selling their shares, you aren’t deterred from buying. Conversely, when the market won’t stop rising, you aren’t one to get caught up in the frenzy (often people will pay up front for a decade’s worth of prospective growth).
#2. When you make a mistake you learn from it. No one likes facing up to their own stupidity, but we’re all capable of error. Even the world’s most successful investor, Warren Buffett. He sold his first share — which he bought at 11 years old — for $40 to lock in a minuscule gain. It would rocket to $202 shortly after. It’s no surprise that now, when a business is exceptional, Buffett’s favourite holding period is “forever”.
#3. You possess common sense. If you don’t know the story of Long Term Capital Management, it was a hedge fund that went broke, despite having a team of PhDs with up to 400 years’ aggregate experience in their arena. They risked everything to make money they didn’t need, whereas with common sense they would’ve realised that they were dangerously overleveraged.
#4. You’re confident enough to stick to your convictions. Neil Woodford, the veteran fund manager, refused to buy into technology stocks the late 90s. He was fiercely criticised but understood that it was nonsensical to invest at such inflated prices. It wasn’t long before the market subsequently crashed.
#5. You can be analytical but are also capable of taking a ‘big picture’ view. Knowledge of basic valuation metrics is necessary to underpin your investment thesis. But, rather than overanalysing everything, sometimes it helps to step back and see the broader picture. A high IQ won’t make the latter any easier.
#6. Shares are your favourite subject. You can’t force this, sadly, but if you aren’t at least a little bit obsessive about your investments then beating the market will remain a pipe dream.
If you tick a number of the above boxes then you have the potential to be an outstanding investor. Congratulations!
