Let me tell you a story about an 11-year-old boy. He grew up in the Midwest where sports like ice hockey and baseball were all the rage. His town, Chicago, even had 2 baseball teams, and the famous Chicago Bears football dynasty of the 1980s.
But this kid had other ideas. He had a gift (and a crazy hard work ethic) when it came to sailing. Despite the fact that no Midwest high school sailing team had ever attended, let alone won, the High School National Sailing Championships held at the prestigious Naval Academy each year, this audacious kid created his high school sailing team, headed East, and became a national high school sailing champion.
Around this time, with the goal of becoming a world champion sailor within 10 years of his 11th birthday, this independent minded kid quit the hockey team he had been on since age 4, much to his dad’s chagrin.
While others kept telling him what he ‘should do’, and what there was no way he ‘could do’ – and to focus on the here and now (opportunities to be a high school hockey star, etc.) - this kid had a vision and a plan and that was that. 8 years later – at age 19, he became the youngest world champion in the history of his sailing class.
So, what does any of this have to do with investing in stocks?
Quite a lot, actually.
As the great Warren Buffett has said, when it comes to successful investing, “…temperament is also important.Independent thinking, emotional stability, and a keen understanding of both human and institutional behavior is vital to long-term investment success.” Notice he says nothing about math or computer skills. The things he is talking about relate to the right side, the emotional side of the brain, not the left side which is associated with mathematical processing.
So, what are the common traits of highly successful investors – the very same ones that 11-year-old seemed to possess when it came to his quest for athletic excellence (world domination)?
Independent Thinking. Just because ‘everyone else’ is doing it, does not make it right. A majority of Americans are obese – does that make it right? Many adults cannot afford a $400 car repair, is that sound? Many investors sell stocks in a panic when the market is down and then buy those same stocks after the market has rebounded 20% or more. Do you want to follow these people? Independent thought and action is a hallmark of great investors.
Patience. Most people want resultsnow, whether when it comes to their health (“lose 20 lbs. in 1 week!”) or their money (“get rich quick!”). But those who are patient have an incredible edge in life, as most things of high value simply take time. Those with the discipline and fortitude to think long term and act with persistency can make massive gains vis a vis those looking for shortcuts.
Long-Term Approach: Investing is a marathon, not a sprint. “Fast Money” is an oxymoron. Those who jump from the latest hot stock or sector to the next (often getting in only after a big run up and the news is already out) usually end up underperforming. Those who find high quality companies and hold them patiently (while still doing their homework) tend to get better results over time as they let the power of compounding work for them. Investing should be like watching paint dry, despite all the financial talk shows that make it sound like a sport with their ‘countdown clocks’ accounting for every second of the trading day, and their frenetic discussions of what is going to do well ‘tomorrow.’
Temperament (Emotional Intelligence): This is the one quality Buffett most cites when it comes to successful investing. The ability to stay calm in the face of perceived chaos. In some respects, you either have this kind of temperament or you don’t, although I am a big believer that such qualities can be learned, especially on the margin.
Humility: Being able to acknowledge when you are wrong, and changing as facts on the ground change, is key to being successful in almost anything in life, but especially investing. That is not to say that you should not maintain conviction on something just because of a temporary, non-fundamental change to a company’s situation for example. But sometimes things do change fundamentally and having the ability to acknowledge as such and make adjustments accordingly is key.
As we know, almost everything in life starts with the brain – our attitude, our emotions, and then ultimately our actions. Understanding how your brain is wired relative to investing is very important, and being OK with independent thought ranks near the top of the list of qualities that all successful investors share.
Happy Independence Day!