3 BEHAVIORAL SKILLS OF GREAT INVESTORS

In one of my favorite podcasts, The Market Huddle, the host always asks guests, “Are great investors born or made?” The nature versus nurture debate is at the center of many of life’s biggest questions, and investing is no different.

Is Warren Buffett uniquely gifted at identifying what makes a business cash flow? Is there anyone better than Peter Lynch at identifying consumer tastes/preferences and finding an investing opportunity? Is Ray Dalio’s knack for recognizing broad market, long-term trends a God-given talent or a learned ability?

Undoubtedly each of these and many other famous investors (e.g., Jim Simons, Bill Gross, Charlie Munger, Mellody Hobson, Abigail Johnson, David Swensen, etc.) are uniquely talented. These few outperformers are rare. There isn’t much company at the top.

In fact, it may be more difficult to succeed as an investor than it is to make it to the NBA. Very few (myself included) will reach the heights and accolades of these investing giants. 

Even so, there are learned skills. If the average person can master these skills, investing like a market legend may be more within reach.

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Emotional Consistency and Discipline

With a storied career spanning seven decades, Warren Buffett is the epitome of consistency. He eats the same breakfast each morning. He lives in the same modest home purchased in 1958. The holdings within his portfolio are remarkably consistent.

He believes the most valuable attribute for an investor is temperament and makes an effort to live by the principles he espouses. The rules around Buffett’s investment framework are remarkably simple. Berkshire Hathaway has been successful in nearly every market environment, and much of the success can be attributed to Buffet’ steady hand at the helm.If you can control your emotions and remain disciplined, success in investing becomes attainable. You may never achieve the immensely high returns of the famed investors, but this shouldn’t necessarily be your main focus. It is not worth the time, effort, or intensity required. It is not easy to find and implement ideas with the potential to outperform the market. Instead, the main goal should be to keep funds invested in the event of a downturn.

We know there will be swings in the market. It is one of the few truisms that is widely recognized and accepted. Commentators and CNBC hosts will speculate about what the future holds, constantly pointing to a recession, a turning market, or a pullback. When the mainstream news is so confident (not necessarily right), it may be tempting to divest and hold cash on the sideline. Read ‘The Man in the Arena’ speech and stay invested! Among other things, this discipline will serve you well.

Satisfaction with the Expected Outcome

A foundational input in finance and investing is the expected return on the market (often denoted Rm). It is used as a basis in a variety of calculations.

The majority of one’s invested assets are typically tied to this variable in some way. With every portfolio and risk appetite, there is an expected return. By adjusting allocation percentages to stocks and bonds, it is relatively easy to find an estimate. Although typically conservative (which is neither good or bad) large, institutional firms like Vanguard will provide estimates of future returns.

There are two scenarios or stereotypical archetypes for individuals looking to outperform these market expectations: the performance junkie and the upside-chasing non-traditionalist.

A fellow owner/author of a newsletter, Jack Raines at Young Money, became a shining example of chasing performance in the stock market. He turned $6,000 of capital into over $300,000 at the peak in about a year. He made some strategic trades in the SPAC market in the midst of the wild market rollercoaster throughout 2020 and early 2021. This is a seriously impressive feat!

Unfortunately, the fallout from making risky bets in the market can be extreme. Jack lost $108,000 in a single day. In the end, he was down about $150,000. The gain is still impressive, but he cited two reasons in a post about why day trading makes for a tough career. It is an all-consuming activity that takes significant time and thought. When every day from 9:30 AM to 4:00 PM is a grueling, stress-inducing fight to stay green, it is easy to burn out.

In the modern era, there you can be tempted or side tracked by the “next big thing” in the investing world. The alternative asset space is growing rapidly, the variety of investment opportunities expands each day. The YouTube ads, pyramid schemes, and the so-called experts selling courses online will herald the benefits of investing in a non-traditional or alternative asset class.

Cryptocurrencies, real estate, micro private equity, venture capital syndicates, etc. offer an upside that the broad market cannot match. As is always the case, higher upside comes with higher risk. The volatility can be extreme and the learning curve especially long. In most cases, these assets over-promise and under-deliver.

The market by nature is boring because we know what to expect. The savvy investor pours dollars into the market on a regular basis, stays satisfied with the anticipated outcome, and spends time focused on other value producing activities.

Understanding Risks and When to Exploit Them

The market is inherently risky, and there are no guaranteed outcomes despite expectations. We expect the market and our portfolios to advance at a certain pace or cadence, yet this is not always the case.

As of September 30th, the market return (the S&P 500 ETF SPY as a placeholder) is -23.87%. This is abysmal. Specifically, 2022 has been a historically treacherous year in the market. The market has been hovering around recession territory for most of the year.

Fortunately this is good news, especially for investors with many years until retirement. These people are commonly called “net savers,” simply meaning that you put more into your retirement portfolio than you withdraw. For this type of investor, there is inherent upside when the market tanks. 

When the market is down, the dollars you invest become even more valuable and important. With the market at or near all-time highs, every dollar is running in the sand. There might be some progress, but it is likely slow. Nobody ever posted their best mile time on a sandy beach. During times when the market is down, the same dollar throws on track shoes and gets ready for the starting gun. Each dollar invested has the potential to earn a higher rate of return.

In years like 2022, you can exploit the down market by pouring dollars into savings vehicles like a Roth IRA, 401k, or brokerage account. The best investors take advantage of times like these. Buffett, known for his wit and quotable statements, said, “Be fearful when others are greedy, and greedy when others are fearful.” 

When the market is down, it is time to be greedy.

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What will make you a great investor isn’t necessarily the same thing that made the all-time investors great. These people do have traits the average person can emulate. Steal the best ideas and practices, then optimize the investing habits/characteristics to increase your likelihood of success.

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Do you have what it takes to be an exceptional investor? What other skills do you think would be required? Today, reply and share your favorite book/article about a famous investor and what made them great.