In this installment of Characteristics of Highly Accomplished Investors, I drill down into the details to give you a practical sense of what it takes to become a Master Investor.
The List of Characteristics
In part 1 of this series I listed 11 characteristics or traits that are shared by highly accomplished investors. A quick review might be in order, but this list is not in any particular order of importance.
- Experience
- Intelligence
- Self-Awareness
- Situational Awareness
- Math Skills
- Willingness to Learn
- Ability to Manage Emotions
- Discipline
- Patience
- Adaptability
- Ability to Measure and Manage Risk
You do not have to acquire all 11 of these traits in order to become skilled as an investor. In fact, it only takes about ten hours of study and practice to reach a level of competence that will place you in the top 30% of the investor population.
Armed with this level of competence, you can coast through the ups and downs of the market without much trouble. Your returns will be above average, but probably not as good as they might be. The upside is that you won’t have to spend countless hours of your valuable free time keeping up with every event that may cause a dip in the market. The downside is that you will probably leave quite a bit of money on the table.
This basic level of skill is more than adequate for most investors. But if you want more than decent results, you have a decision to make. How much time and effort are you willing to put forth in order to move up the ladder of competence?
The Ladder of Competence
The ladder of competence is a progression through increasing levels of investing proficiency. This table shows the levels of competence for each of the 11 characteristics.
From here on, I will refer to highly accomplished investors as Masters, because they have clearly mastered both the art and the science of investing. They are smart, skilled, and most importantly they have the right temperament for the task. I’ll talk more about temperament later.
Masters develop over time, starting out as we all do – as novices. They develop competence through trial-and-error and study. They become proficient by carefully cultivating the skills and knowledge of the masters who came before them. And they become expert when they learn to think independently, and create their own strategies.
Not everyone can become an expert or master, but everyone can become proficient if they have the desire and are willing to put in the time to learn how.
Characteristics
1. Experience
We all start out as novice investors. About half of us will never progress beyond this level, either from a lack of interest, a lack of funds, or a faulty belief system that we stubbornly cling to, regardless of how poorly we perform.
Masters have experience in the market, and that means they have been through at least one full market cycle – a bull market, followed by a bear market, and a recovery. They have made mistakes along the way, and they are open-minded and humble enough to learn from their mistakes.
How much experience does it take for an ordinary investor to reach this level of competence? At least 4 years, which is the time it takes for a full market cycle to play out. One of my responsibilities as a head trader was to train the new recruits on how to navigate the market without getting blown up. After doing this for a few years, I was able to tell within a few weeks which traders would succeed and which would wash out. It was always the ones who soaked up every bit of available information and adapted their trading style accordingly who went on to bigger and better things. The ones who were cocky, and thought they had it all figured out, almost always crashed and burned within the first 3 months.
If you make an effort to learn from your experience, you will move up the ladder. If not, you will be stuck at the bottom, and every market cycle will be your own Groundhog Day.
2. Intelligence (the capacity to learn)
It may surprise you to learn that raw intelligence (as measured by I.Q.) is not a reliable predictor of investing competence. In fact, some studies I’ve seen indicate that investors with a very high I.Q are more susceptible to overconfidence than investors with an average I.Q.
Overconfidence is a return-killer in investing. It not only leads to very expensive mistakes, it also hinders the ability to learn from these mistakes. That’s a double-whammy.
Someone with a 120 I.Q. who thinks he’s a 110 is more likely to succeed than a 140 I.Q. who thinks he’s a 160. The former has humility and the latter has hubris. Humility is a winner every time. As Warren Buffett famously said, “The most important quality for an investor is temperament, not intellect.”
I have a rule of thumb that deals with the issue of intelligence. If you are below average, you will probably be better off with a diversified portfolio of index funds that you only rebalance once per year. If you are of average intelligence, you can achieve above-average returns. Why? Because the market is full of overconfident people who think they are smarter than the market. They are a big source of alpha. Just bide your time and wait for the opportunities to take advantage of them.
3. Self-Awareness
In my opinion, self-awareness is a critical characteristic for an investor. If the term sounds a little nebulous, let me explain. Someone who is highly self-aware can step outside of himself/herself and observe, objectively, their own beliefs, assumptions, and behavior patterns.
They can recognize when their beliefs are at odds with reality, and when their behavior is at odds with their belief system. But they don’t stop there. They work to find out why this is the case. By doing so, they discover their natural strengths and weaknesses, and adjust their strategy accordingly.
A person who is self-aware has a significant advantage in that he/she learns from mistakes and corrects weaknesses as they go along. Someone who lacks self-awareness doesn’t learn from mistakes because they don’t admit to themselves that they have made a mistake. Therefore, they are doomed to repeat the same mistakes again and again.
4. Situational Awareness
Master investors don’t act on an idea until they have considered the full range of possible outcomes. The first rule is don’t lose money. You know who else is really good at situational awareness? Soldiers in combat. They quickly learn that danger is lurking everywhere, and one misstep can end their life. So they don’t take a step forward until they have scanned the landscape and checked for signs of an ambush or the presence of booby traps. It’s a survival instinct.
Another good example is a S.W.A.T. team entering a building where an active shooter is present. They don’t move forward until they are sure that they can do so safely. Again, it’s a survival instinct.
A Master investor is not risking her life, but she is risking her life savings. Those are high stakes too. So before she pulls the trigger on a trade, she scans the investment landscape and looks for ways she could get hurt. That includes things like the economic environment, market momentum, consensus analyst opinion, earnings trends, relative valuations, and so on. She uses situational awareness to answer the question, “Is this the right time to make this trade?”
5. Math Skills
Most Master investors have advanced math skills. They’re quick with numbers, they can calculate the odds of winning and losing on a trade idea, and many of them understand statistics well enough to read and comprehend academic papers that are filled with complex equations.
But you don’t have to be a math expert to be a skilled investor. If you can add, subtract, multiply, and divide, you’re half way there. If you can understand how compound interest works, you’re even closer. If you understand basic probability theory, you’re almost there. And if you take a Khan Academy course in basic statistics, you have all the math skills you need.
Masters already have these skills, but anyone can learn them if they are willing to put forth the effort.
Let’s review
Today we covered the first 5 characteristics of highly accomplished investors. I am well aware that this summary is in no way sufficient for you to acquire these characteristics. Each one must be explored in depth, and that is beyond the scope of this article.
Fortunately, there is a rich body of educational material out there in the ether. Much of it is free. The challenge is finding reliable and credible sources, and not wasting time and effort on plain vanilla courses that lack anything of real substance. I will address this in another installment of this series.
I’ll leave you with an exercise that may offer some value. I suggest that you write down these 5 characteristics, and then do an honest assessment of how accomplished you are at each of them. This will require humility, honesty, and critical thinking. It’s a good way to find out where you are strong, and where you need work. It can be very tough to grade yourself on matters of competence, but that’s exactly what Master investors are good at.
If you put in the work to do this exercise, you will undoubtedly discover some things about yourself that you were not aware of before. That’s where the value lies.
What’s Next
In the next installment of this series, I’ll cover the remaining 6 characteristics of highly accomplished investors. In the meantime, if you want more information on this topic, message me through my website.