The individual investor
The stock market is cruel to the dilettante
I have given a lot of thought to the kinds of personal traits or personal qualities that lead to successful investing.
One irony is that geniuses don’t necessarily do well in the stock market. This would include mathematical geniuses.
Isaac Newton is a good case in point. After losing his shirt in the South Sea Bubble he reportedly said “I can calculate the movement of stars, but not the madness of men.” (Wikipedia). Lord Radnor is said to be the source of this quote. We learn from Newton’s niece that he lost some twenty thousand pounds, the equivalent today of millions of pounds. Newton was no fool when it came to money. For many years he ran the British mint.
Nobel Prize winners and other highly regarded academics in economics and finance frequently show no special aptitude.
As well, and of more than passing interest to us mere mortals, you don’t have to have a soaring I.Q. to do well.
Three qualities
At the end of his career in 1974 in the midst of what may still be the greatest bear market since the 1930s, Benjamin Graham gave a speech to securities analysts. It was styled “Renaissance of Value”, and was reprinted in Barron’s September 23, 1974, and is quoted by Roger Lowenstein in ‘Buffett’. (Lowenstein, 1995,2008) p.160. Graham remarked that investing did not require genius: “What it needs is, first, reasonably good intelligence; second, sound principles of operation; third, and most important, firmness of character.” (Emphasis added)
Graham’s prescription is not far different from that given by Warren Buffett as described in Roger Lowenstein’s book, Buffett, The Making of an American Capitalist.
“Buffett said it did not require a formal education, nor even a high IQ. What mattered was temperament. He would illustrate this with a little game in business school classes he spoke to. Suppose, he would tell a class, each student could be guaranteed 10 percent of one of their classmates’ future earnings. Whom would they choose? The students would start to scrutinize one another intently. They weren’t looking for the smartest, necessarily, Buffett would observe, but for someone with the intangibles: energy, discipline, integrity, instinct. What mattered most was confidence in one’s own judgment, from which would flow the Kiplingesque cool to keep one’s head ‘when all about you are losing theirs.’ ” (Lowenstein, 1995,2008)p.333. (Emphasis added)
Lowenstein reports: “Most of what Buffett did, such as reading reports and trade journals, the small investor could also do. He felt very deeply that the common wisdom was dead wrong, the little guy could invest in the market, so long as he stuck to his Graham-and-Dodd knitting. But people, he found, either took to this approach immediately or they never did. Many had a “perverse” need to make it complicated.” (Lowenstein, 1995,2008)p.331’(Emphasis added)
By ‘Graham-and-Dodd knitting’ he refers to what Benjamin Graham called ‘principles of operation’. Principles of operation refers to one’s approach to investing. The Motherlode unsurprisingly goes into this subject in detail. It is contained in Part 4: Principles of Operation.
John Neff, one of the investing greats, puts it this way: “investment success does not require glamour stocks or bull markets. Judgment and fortitude were our prerequisites. Judgment singles out opportunities, fortitude enables you to live with them while the rest of the world scrambles in another direction.” (Neff, 1999) p.4. (Emphasis added)
Words used here include: good intelligence; sound principles of operation; character; energy; discipline; integrity; instinct; Kiplingesque cool; judgement; and, fortitude.
The great investors
I find it fascinating to think about what it is about the great investors like Warren Buffett and John Templeton that makes them great. What sort of personal qualities or traits do they have that allows them to succeed? It is certainly more than a high I.Q. We identify and discuss these qualities in Chapter 20. The Right Stuff in the Motherlode. Chapter 20 contains a number of sections that are listed and linked below in this post.
These personal qualities can be cultivated
What is particularly heartening; these personal qualities can be cultivated.
This point cannot be emphasized enough. One is not born an investor. It is something that can be learned. And as it is learned, the personal qualities necessary for success can be nurtured. In time, the personal qualities will fully develop.
We might even recognize latent qualities in ourselves that are well suited to investing. All we need to do is call on them and develop them. So, this post is subtitled – ‘The personal qualities the investor needs to cultivate’.
Determining early on whether you are suited to taking on your own investments can save you a lot of grief later on.
Some friends have told me they are simply not interested in handling their own investments. That is a perfectly sensible decision for them to make. Many people vacillate. They would like to try but are unsure about whether they would be able to do it. Chapter 20. The Right Stuff in the Motherlode and the Sections listed below that it contains will also help this latter group make up their minds.
The decision to handle your own investments should not be a half-hearted one. It must carry with it a determination to do all of the homework and endure all of the vicissitudes necessary to make it a success.
Personal qualities – two groupings
This post and the sections in the Motherlode listed below deal with two types of personal qualities: 1) personality; and 2) analytical and creative skills and judgment. They merge but it is useful to keep in mind that we are looking at two kinds of things
We have seen that Ben Graham and Warren Buffett use words like character; energy; discipline; integrity; instinct; Kiplingesque cool; judgement; and, fortitude. Here is my own list.
20.03 Ability to make decisions based on the long view
20.07 Insight and good instincts
20.09 Counterintuitive thinking
20.12 Adaptability and flexibility
20.20 Reasonably good intelligence
These qualities are not always distinct from each other. Patience and Stick-to-itiveness overlap, as do Kiplingesque cool and Resilience, to give just two examples. As well, these qualities do not operate independently. They work together. An investor who actually does the necessary homework will find it easier to think independently. The patient investor will find it easier to stick to the effort. The investor with resilience will find it easier to make difficult decisions and take risks, as will the investor who has done his homework, and so on.
The stock market is cruel to the dilettante
Let me paraphrase Plato: “He who wishes to serve his country [be an investor] must have not only the power to think but the will to act.” That is, you have to do it with a full heart and not simply dabble.
Want to dig deeper into the principles behind successful investing?
Click here for the Motherlode – introduction
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