Four Traits Of A Successful Investor

Whether you make use of a discount brokerage, a sleek new financial app or lean on the advice of a financial advisor, you have more freedom to research and explore the stock market than ever before. But none of that guarantees good results. As I’ve stated in previous posts, and it’s a point worth repeating, investing is in some ways a so-called “loser’s game” in which the first key to winning is to avoid big mistakes. Especially when the stock market is hot, individual investors all too often fool themselves into thinking they are smarter than they really are. They become infatuated with the latest trend, or with a “hot” investment tip and become convinced they can “beat” the market. Beating or outperforming the market is possible, and later we’ll explore ways that investors have historically been able to do so. But it’s difficult, and any attempt to do it should be approached with caution and humility.

This note of caution applies to professional investors as well — many of whom not only fail to beat the market, but who underperform the market, sometimes by a good deal.

The investments of actively managed mutual funds, for example, are overseen by professional portfolio managers who closely monitor their funds and have access to the best available research. In any given year, many of these funds will successfully beat the market, and it is on that basis that they sell themselves to investors. Yet over a given 10-year stretch, most actively managed stock funds will fail to outperform their relative benchmark (the standard or average achieved by similar funds). A recent Standard and Poor’s study found that zero out of 2,862 managed mutual funds consistently fell into the top quartile (or 25%) of performers from 2009–2016. This study, among others, has played a role in the current trend of investors leaving managed mutual funds for cheaper, more passively managed index funds.

The lesson I want you to take away from this is two-fold. First, even professionals, who devote their lives to investing and have access to the best information available, often fail. This basic fact is easy to lose sight of when the market is hot and everyone seems to be making money. It was said of the ‘82-’99 bull market that you could throw a dart at an investment board and probably pick a winner, and that isn’t far from the truth. But success in the long term is a trickier affair, as the ups and downs of the last decade have shown. Second, and somewhat surprisingly, individual investors have certain advantage over fund managers. For reasons I’ll explore in a later article, these managers become locked into investment strategies that prevent them from adapting to changing circumstances and also encourage them to follow a dangerous “herd mentality.”

So, given that investing is such a tricky affair, what, you might ask, makes for a successful investor? If you scan through the studies on past performance, and also glean the advice of superstar investors like Warren Buffett, you will find four major traits common to the successful individual investor:

1. They started investing early in life.

2. They minimized their tax burden.

3. They refrained from short-term speculation and held their investments for a long time, not unloading positions when the markets were near its bottom.

4. They invested in quality companies that were trading at reasonable prices and were conscious of the cost of professional management, often purchasing low-cost investment funds.

And the good news is that Millennial investors — with the chance to begin early, with their skepticism and cost-savvy habits, and their ability to research and form independent opinions — are in a perfect position to excel at all four.