Good investors have several obvious traits. The apply a little differently to each of us. Which are yours?
- Accumulates capital well. The good saver idea. No good investor exists without first having money to invest. Learning to save is the first and most important trait.
- Good investors know how to estimate business value and they understand the market pricing mechanism. They know the two are only slightly connected.
- Protecting capital that exists is a common trait of good investors. People understand not to store cash in a green garbage bag and they understand strong passwords for the their banking and investment accounts. Sometimes they forget that the source of their savings is the root value and so forget to protect their income from sickness and injury; even death.
- Good investors tend to be keepers not traders. They recognize the difference between business value and market price. If the instinct is to buy and sell based on price, then the trader form dominates. That form is much harder. It requires that you know real value and how your fellow earthlings will relate to news about that. Price is highly dependent on how people think while value tends to be less transient. Microsoft at $60 is pretty much the same business as it is at $40 and $80.
- Good investors are patient. They tend to own investments to serve some future need. That need is never, “Spend everything today.” If you don’t need to spend it today it does not matter how it is priced today. Most of them hold a lot of cash because there is nothing priced well enough to buy — yet. One fund manager has told me that he never buys anything, but sometimes he lets the market sell to him. I have seen him with 50% of the assets in cash.
- Good investors understand risk. As in I might lose my money or the income from it. Variability is only risk if your time frame is short or if pricing anomalies provide your edge. Price variability is just static around the value signal. Like AM radio. You cannot make much sense of the static.
- Good investors are objective. They act when they are wrong. Not every decision will be a good one. When circumstances or knowledge change, be prepared to quit. Nursing investments that have turned out to be poorly acquired is a losing deal.
- Good investors have few positions. If you have only a few, you tend to be very vigilant and you tend to find better ones. This kind of comparison works. I know a fund manager with more than a billion dollars under management who has about 35 stocks in the portfolio. He avoids risk, challenges and other blemishes because he doesn’t need them. It is not hard to find 35 good businesses. He looks for changes in them and he thinks 35 is probably too many.
- Good investors know what they can bring to the investment other than money. And they expect to get paid for it. Risk, time, tax position, quantity of capital, industry knowledge, and give up of liquidity. Every investment pays the same rate of return if you consider all the inputs.
Wall Street Journal columnist, Jason Zweig offers this thought.
“In the long run, your returns depend less on whether you pick good investments than on whether you are a good investor”
Investing is tough stuff, but the underlying principles are easy enough to see. Hard to act on though. A guide could help.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772