Originally published: May 19, 2023 (distributed by Andrews McMeel Syndication)
What do you think makes a "great investor"? Is it simply the person who achieves the best returns, or has the ability to "sniff out" an opportunity? What about intellect? Are great investors just smarter than everyone else? Or is there something else that separates the good from the not-so-good investors?
Think Warren Buffett. He believes that "Temperament is more important than IQ. You need reasonable intelligence, but you absolutely have to have the right temperament. Otherwise, something will snap you" (tinyurl.com/y2uadrvh).
It's hard to disagree. Being effective as an investor is more about sensibility and less about IQ or guts or the drive to win.
Investing is not a contest. It is not a sport.
Further, investing is not as easy as it might seem. There is a lot to learn, and the learning never stops. Markets change, goals change -- in fact, even the unanticipated (think COVID-19) can affect an investment program.
What else? Understanding that every decision will not be the right decision. Accepting that the goal is to put money to work, not to strive for home runs. Recognizing that investing is not a competition. Understanding what investors do and don't control. Plus, having the nerve to recognize and weather inevitable storms.
I also agree with Wall Street columnist Jason Zweig's seven "virtues": curiosity, skepticism, independence, humility, discipline, patience and courage. (tinyurl.com/3p2mmx8w). Let's focus on just four.
CURIOSITY: "Ordinary investors are afraid of what they don't know, as if they are navigating the world with those antique maps that labeled uncharted waters with the warning 'here be dragons.' Great investors are afraid of what they do know, because they realize it might be biased, incomplete or wrong. So they never deviate from their lifelong, relentless quest to learn more."
In my view, curiosity drives learning. Resources abound, including those provided by regulators. The Financial Industry Regulatory Authority, which oversees U.S. broker-dealers, provides important, understandable information on the topics of personal finance and investing in its For Investors section (tinyurl.com/yc7hhwy3).
SKEPTICISM: "Numbing investors with numbers is a standard marketing tactic in the financial industry. That's why skepticism is one of the seven virtues of great investors."
Agreed. As I noted in my latest book, "The Discerning Investor," "Had I not started my Wall Street career as a lawyer preparing proxy statements, working on prospectus disclosures, and participating in industry committees, I doubt I would have developed the lawyerly traits -- skepticism being most important -- needed to manage retirement portfolios within a framework packed with uncertainties, both in the client's life and in the markets."
DISCIPLINE: Discipline is described as "not making it up as you go along, never flying by the seat of your pants. It means using rules, checklists, procedures and policies to make decisions" (tinyurl.com/4yb9sf4h).
Zweig offers the following example: "The late global investor Sir John Templeton relocated from New York to the Bahamas where, he told me decades ago, The Wall Street Journal arrived days late. By reading the news a week later, Templeton told me, he could put it in perspective and prevent himself from over-reacting."
PATIENCE: Patience "is often measured not in months or years but in decades."
Again, I have to agree. If you are on a path to creating wealth, the most important tool is time. Patience is absolutely necessary to maximize compounding by earning interest on interest. Time is the key contributor, assuming the chosen investment has potential for appreciation.
If you think you know everything you need to know, remember Zweig's key point on curiosity: Great investors keep learning. That's why investors like Buffett and Charlie Munger are still very much involved, even though they are both in their 90s.
If you think you can avoid due diligence, you might wind up with investments that may not be in your best interest.
If you think you don't need rules, you'll be flying by the seat of your pants.
If you don't think you need to start investing early, you'll never take full advantage of the math of compounding.
How would you define your temperament when it comes to investing? It's a question worth exploring.