Despite much belief to the contrary, investing is not an IQ test. It’s a test of character. Of balancing patience and decisiveness. Of your willingness to get comfortable being uncomfortable.
What does it take to be a successful investor? In my experience working with extraordinary investors, there are a few critical character traits that help to develop a successful investment portfolio. They have little to do with intelligence. And almost everything to do with mindset.
#1. Outstanding Investors are Patient and Prioritize Survival
“Waiting helps you as an investor and a lot of people just can’t stand to wait. If you didn’t get the deferred-gratification gene, you’ve got to work very hard to overcome that.” – Charlie Munger
Being a patient investor might not be easy for you, as Warren Buffett’s business partner Charlie Munger points out in this quote. Warren is fond of saying that the stock market is designed to transfer money from the active to the patient. Warren and Charlie are keenly aware that the magic of compounding is your only friend on Wall Street.
How do great investors let compounding work in their favor? Survival. Even more important than big returns, you need to be unbreakable. Financially unbreakable. The mindset around this is a bit contradictory. You must be optimistic about the future, but paranoid as heck about what will prevent you from getting to the future.
Why is survival so critical? Because compounding only works if you can give an asset years and years to grow. Compounding is the royal road to riches. Compounding is the safe road, the sure road. And, fortunately, anybody can do it.
Personal Note: After re-reading this character trait I am recognizing yet again that I did NOT get the deferred-gratification gene, and I have to work on my money mindset just like everyone else. But I did luck out and get the optimism that comes from being a middle child.
#2. Triumphant Investors Have a Plan, but Accept Uncertainty as Part of the Equation
“Plans are worthless, but planning is everything” – Dwight Eisenhower
Plan on your plan not going according to plan. If the Year of our Lord 2020 taught us one thing, it that we can’t predict anything. But that does not mean that planning is a fruitless exercise. The value of planning is not in the accuracy of it, but in the reasoning that you must go through to make a plan.
Making plans and decisions are a fundamental part of life. For the great majority of investors, making money requires a plan, self-discipline and desire. If you are Elon Musk, you don’t have to know about the markets or about yields or price/sales ratios. You’re a phenomenon in your own field, and you’re going to make big money as a by-product of your talent and ability. But this kind of genius is rare.
Rather than try to foresee and plan too much for an unpredictable future, successful investors are able to zoom out to create an overarching philosophy around investing. Then they occasionally zoom in to ask: “What can we do next to take a step forward in our plan?” They reiterate this process over and over.
Yet despite the crucial nature of making good investment decisions, most people have little if any framework or process around how to make those decisions. The typical affluent investor is not a genius. They just happen to have spent time creating a financial and investment plan, hopefully with the help of a trusted advisor.
Personal Note: I love to take the best practices from institutional investing (creating a document called an “Investment Policy Statement”) and applying those to a client’s personal situation. I find this framework helpful when encountering the inevitable curve balls that happen in life.
#3. Fortuitous Investors are Willing to Accept Trade-Offs Between Risk and Reward
“In the end, how your investments behave is much less important than how you behave.” – Benjamin Graham
Successful investors do not obsess over the potential for drawdowns to the point where they paralyze their portfolios or stop investing altogether. They don’t focus on risk all day, every day.
The human tendency towards “doing something” to feel in control when markets are rocky can lead to detrimental investing behaviors: checking account balances too often, focusing on short-term volatility, selling or buying at the wrong time or abandoning a long-term strategic investment plan.
And those bad behaviors can fundamentally damage investors’ long-term returns. The smartest investors I have known accept risk and only take the amount and type of risk that is appropriate for their own situation. They adjust their mindsets (and their behavior) to accept the tradeoffs between risk and reward.
And that’s how they stay ahead of the game. Not by avoiding swings in price, but by living through them.
Personal Note: I have had to suffer through occasional bouts of my own bad behavior to deeply ingrain this character trait into my mindset. Turning the monitor off and going for a run is the right response sometimes.
Reframe Your Investor Mindset
Can you relate to these character traits? Whether you were born with these tendencies or not, we can all work to develop the right investor mindset.
Don’t let fear or lack of confidence imprint on your investment decision making. Resolve to be patient for the majority of the time. Relax and let compounding work its magic.
At the same time, be decisive and aggressive when economic and market cycles are changing. Recent times have taught us all to build a healthy tolerance for uncertainty. A positive side effect may be an increased capacity to see volatility as opportunity - and to pounce on it.
Investing is the ultimate test of character. And unless you are tested, how do you know who you are? Schedule some time with me if you are ready to find out.