This is the third in a series about the unique skills, abilities, and characteristics of highly accomplished investors. We pick up from where we left off in part 2.
6. Intellectual humility
Acknowledging what you don’t know is the beginning of wisdom. Stay within a well-defined circle of competence & identify and reconcile dis-confirming evidence.
7. Rigorous analysis
Use checklists to minimize errors. Determine value apart from price; progress apart from activity; wealth apart from size. Think forwards and backwards – Invert, always invert.
8. Patience
Resist the natural human urge to act. “Compound interest is the eighth wonder of the world” (Einstein); don’t interrupt it unnecessarily. Avoid unnecessary transaction taxes and frictional costs.
Investors become competent when they give their strategy enough time to work. I have seen countless investors abandon a strategy at the first sign of trouble. They impatiently move on to the next shiny object that catches their attention. Instead of viewing a short-term loss as a defeat, why not take it as an opportunity to learn and improve your skill set?
9. Decisiveness
When proper circumstances present themselves, act with conviction. Be fearful when others are greedy, and greedy when others are fearful. Opportunity doesn’t come often, so seize it when it comes.
10. Focus
Keep it simple and remember what you set out to do. Remember that achieving your financial goals is more important than making a big, short-term score. Face your mistakes; don’t sweep them under the rug.
11. Self-awareness
Self-awareness is a trait that is difficult to learn if you weren’t gifted with it. It requires a willingness to do some uncomfortable things, like looking inward, and taking an honest account of your biased thinking and flawed logic. It’s very hard to do, even for a trained psychologist. But it’s not impossible.
The rewards for putting forth the effort to become a more self-aware investor are substantial. You will not repeat the same mistakes as often. You will tend to avoid giving in to emotional impulses that have gotten you into trouble in the past. And you will be in a better position to find a strategy that fits well with your natural instincts and decision-making style.
12. Situational Awareness
While self-awareness is all about turning inward, situational awareness is about turning outward. It’s about seeing reality as it is, rather than as you wish it to be.
Are you the type of person who is quick to conclude that sometimes things just don’t add up? The many ways in which this skill translates into the avoidance of a disaster are obvious. A stock that appears to be unbelievably cheap might be cheap for good reasons. A strategy that seems too good to be true might be bogus.
When I find myself salivating over a great stock that has been dropping in price, the first thing I want to know is… who is selling it? Do they know something that I don’t?
13. Math Skills
Investing only requires eighth-grade level mathematics. hances for success. Understanding basic probability theory will go a long way. Here’s the good news: All of the math that you will need to achieve competence as an investor can be learned in 10 hours or less.
14. Willingness to Learn
No matter how much experience and intelligence you have, you will not reach true competence as an investor unless you are open to learning from your own mistakes, and the wisdom of those who came before you. This can be done through books, training videos, one-on-one coaching or exchanging ideas with someone you look up to. If you think you have it all figured out, you’re probably doomed.
15. Ability to Manage Emotions
In investing, it is always important to have a logical, rational basis for what you are doing. Our emotions are not equipped to deal with probability and randomness, which are two defining elements of investing.
The ability to control your emotions in order to make rational decisions consistently is one of the hardest things for investors to master.
16. Adaptability
The best investors are good at adapting to changing circumstances. When the facts on the ground change, they ask themselves whether their assumptions are still valid. What they don’t do is bail out of a trade, or a strategy, simply because it has become uncomfortable.
17. Risk management
Finding a great strategy is all well and good, but it’s all for naught if you can’t stay in the game. Keep a record of your most and least successful trades, and adjust your bets accordingly. If your staying power will be compromised by a potential loss on a strategy or a trade, it’s time to rethink it.