The right stuff
The personal qualities the investor needs to cultivate
Ben Graham tells us: “To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks.” (Graham, The Intelligent Investor, 1973) p. 287.
And most investors can just stop right here. Most investors are well advised to simply invest in an index fund/ETF for the common stock part of their portfolio. That can provide ‘satisfactory’ returns. That doesn’t exactly work in all countries. Some country stock markets are quite unbalanced. For example, Canada has been heavily weighted to financial and energy stocks leading to lack of diversification. But, that’s another story.
Superior returns
This post is written for investors seeking what Ben Graham, quoted above, calls ‘superior’ returns. As I have noted, gaining an extra 2% return per annum can double your income in retirement. This happens through the magic of compounding. See here. So, for those willing to take on a task that is ‘harder than it looks’, there is a substantial reward.
In a speech in 1974 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.” (Lowenstein, Buffett, 1995, 2008) p160.
What I want to focus on in this post is ‘firmness of character’. But first, two preliminary points about motivation and work ethic.
Motivation and work ethic
Jane Siebels who knew Sir John Templeton, Julian Robertson (famed hedge fund manager) and Warren Buffett feels: “…there are certain recognizable and common attributes held in common among these men. She believes that all three have a true passion for investing but hastens to add that she does not believe that the actual accumulation of money for themselves motivates them.” (Proctor & Phillips, The Templeton Touch, 1983, 2012) p359. I agree with this. I really enjoy investing. Plus it supports my family.
I also believe in the adage, credited to Edison, that success is 90% perspiration and 10% inspiration. That has certainly been my experience. Investors have to do their homework. Many would-be individual investors shy away from handling their own investments because they feel that the investment pros are working at it full time and thus they couldn’t possibly succeed doing it themselves on a part-time basis. This is not true.
Any hard working career person with a family and a firm belief in life balance should be able to make the time to learn about investing and manage their own investments. Based on my years of saving and investing I know it is true. It has been worth the effort. But, you have to make the commitment.
When I read about the great investors and what makes them great I read words like: character; energy; discipline; integrity; instinct; Kiplingesque cool; judgement; and, fortitude.
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.
To my way of thinking, the main qualities needed to be a successful investor are those necessary to cope with the volatility, the vagaries (craziness) of the stock market and a changing world.
Dealing with volatility
As for volatility the first thing is the ability to make decisions based on the long view. This is a matter of framing, how you look at things, strategic thinking, patience, impulse control, self-reliance, stick-to-itiveness, resilience, Kiplingesque cool and lastly, moderate risk tolerance.
I put risk tolerance last because I firmly believe that if you take a proper view of the volatility and vagaries of the market, risk for a well-balanced and diversified portfolio is really not that high.
Dealing with vagaries, craziness and a changing world
All investment decisions are made in a world of uncertainty. This requires sound judgement, insight and good instincts, natural curiosity, adaptability, flexibility and a skeptical mind. Broad reading particularly helps with a changing world.
Ben Graham’s three points
He begins with reasonably good intelligence. What is interesting is that geniuses don’t necessarily make the best investors. Isaac Newton lost his shirt in the South Seas Bubble. The brilliant mathematicians at Long Term Capital Management (LTCM) were too smart by half. They suffered from hubris and over-confidence. The whole thing blew up in 1997 with billions of dollars in losses. Hubris can strike any investor no matter what their IQ.
Sound Principles of Operation means simple a sound investment process. This blog and the Motherlode website deal with this in some detail. (see scatter index on home page). As for firmness of character, the traits listed above more or less cover it. As well, much of it is dealing with behavioral biases and cognitive errors and investment psychology. That subject is easily searched in the scatter index on the home page of the Motherlode. I discuss all of the character traits mentioned above in the follow Chapter and Sections of the Motherlode.
To dig deeper take a look at Chapter 20. The Right Stuff
These Sections flesh out the ideas presented above:
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
Want to dig deeper into the principles behind successful investing?
Click here for the Motherlode – introduction.
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