List of essential investing skills

Every investor must have these essential skills in order to achieve competence.

Self Awareness. If you don't know who you are, the stock market is an expensive place to find out. Trial and error is a workable approach to most things in life. Call it on-the-job-training, or learning from experience. 

But when it comes to investing in the market, you want to keep errors to a minimum, because errors can be very costly. Self Awareness is the ability to step outside of yourself, and take an honest accounting of your biases, tendencies, behaviors, and preferences in order to determine where you need improvement.

Situational Awareness. Stock prices are influenced by a myriad of factors, and one of the most important is where we are in the business cycle. A skilled investor pays close attention to which of the four stages of the business cycle we are in, because each market sector outperforms in some stages and underperforms in others. 

Knowing where we are in the cycle will enable you to tilt your portfolio allocations in a way that capitalizes on the relative strength or weakness of each sector.

Critical Thinking. 

There are many aspects to the skill of critical thinking, but an investor only needs to master a few of them to become successful. For example, let's say you like a company because you use their products and you are very impressed with them. It would seem logical to a novice investor that this is enough of a reason to invest in the company. But a seasoned investor knows that a company with superior products isn't necessarily a good investment, especially when the stock is overpriced. It would be better to determine what a fair price would be, and then wait until the price reaches fair value before investing. 

Math & Probability. Contrary to popular belief, you don't have to be a math genius or hold an advanced degree in order to be a successful investor. But there is a fair amount of math required to understand whether a company is undervalued or overvalued. There is a need to be able to calculate probabilities as well. For example, how likely is it that ABC Corporation will outperform the broad market averages over the next 12 months? To answer a question like this, you would need to know what inputs to use, what formulas to calculate, and what the result means for your decision to buy or not buy.

Time Value of Money. A dollar today is worth more than a dollar in the future, so an investor must demand a rate of return that is high enough to justify their current investment. If the expected return on an investment is less than the expected rate of inflation, the investor will end up with less purchasing power than they have today. Knowing how to estimate future rates of earnings growth is a critical skill for an investor to have.

Portfolio Theory. This is another essential skill for any investor. It is a practical method for selecting investments in order to maximize returns within an acceptable level of risk. It can be used by risk-averse investors to build a diversified portfolio that avoids taking on too much risk. Conversely, it can help a risk-seeking investor to maximize returns while being fairly compensated for taking above average risk. 

Game Theory. There are several aspects of game theory that can apply to making investment decisions. This branch of mathematics involves the analysis of strategies for dealing with competitive situations where the outcome of a participant's choice of action depends critically on the actions of other participants. An example of this is Nathan Rothschild's call for investors to "buy when there's blood in the streets."

Organization & Planning. As Yogi Berra said, "If you don't know where you're going, you might end up someplace else." Many of us are not very good at planning and organization in other aspects of our lives, but when it comes to investing, we have to at least make an effort to construct a plan that will keep us on track and organized. Without a plan, we revert to "ad hoc" or random investing, and we can expect results that are well below our expectations.

To sum it up, these skills are absolutely essential for investors. It takes work for most of us to develop these skills, but the payoff is much better investment outcomes.