Actually, this title is somewhat incorrect. There is no single “character trait” that EVERY investor must have. This is because in the field of investing, many different personalities can co-exist and still make money. Investing is not a science where if you do XYZ, you will be guaranteed fabulous returns. Investing is a hybrid between and an art and a science. There are general rules, but the specifics are different from person to person.
So in this post, I’m going to cover the 4 character traits that 99% of successful investors have. Of course, there is always the 1% that falls in between the cracks, but why worry about them? As long as you follow these guidelines, you’re all set.
I remember an HR course I took back in college, and the first question my professor asked was “how do you define maturity?” Answers varied highly, from “someone who is financially successful” to “someone who can take care of a family”. As usual, this was one of those trick questions where everyone is (all the students) supposed to get the answer wrong. My professor said that maturity is when you can handle stress. In other words, poker face. You’re brother might have been in a car accident and you might have just lost your job, but other people certainly should not be able to see that from the way you carry yourself.
The field of investing is probably one of the most stressful things you can probably do. Sometimes, you are literally watching your wealth vanish before your eyes. Markets can move 30% in two weeks. Business is not as stressful, because what business evaporates 30% in two weeks? Almost none. The world of investing moves much faster than the world of business.
If you want to invest profitably, you absolutely have to be able to control your stress. If you let your stress blow out of control, you’ll let your emotions take over. I remember reading somewhere that there are 3 parts of the brain. There’s the reptilian part, the mammal part, and the primate part. When you let your emotions take over (the reptilian part of the brain), you cannot think rationally (the primate part of the brain has been given the boot). All you’re able to think of is fight or flight. And when you don’t think rationally like a human being, you lose money. It’s that simple.
In addition, stress management is absolutely critical if you want to live a happy life. I find that when I’m happy, I invest better. Kind of weird, but that is probably because when I’m happy, I feel relaxed. And when I’m relaxed, I do not risk letting my emotions take over. When I have my emotions under control, I can make rational investment decisions.
Some of the world’s greatest investors, traders, and fund managers are bombs just waiting to explode. If you’ve heard of Michael Steinhardt, you’d know that he has one of the shortest tempers in the world. If you (one of his staff) eff’ed up, he’d be sure to let you know his disappointment in a loud way.
So you’re probably thinking “This guy doesn’t seem to be calm. How can he be a successful investor?” Although Steinhardt isn’t a calm person, when it comes to trading he is emotionless. As long as you maintain your cool when you’re doing your work, you will be a successful investor. Stay calm so that your emotions are kept under control. Business is business. What you do outside of investing is your choice.
Any successful investor must live in a stable environment. If you worry about making enough money off your investments to make ends meet at home, the irony of it is that you probably won’t make enough profits. Why?
Because when you’re the sole bread winner of the household, you’ve got the deep-rooted desire to make money. “I just wanna make money. I have to make $X this year. I absolutely have to do this, or else how is my family supposed to survive?” What ends up happening is that you push yourself too hard.
When you push yourself too hard to make profits, you end up chasing investments that you wouldn’t otherwise make. Let’s assume that there’s an opportunity to invest in gold right now. It’s not the most attractive opportunity, but maybe it will turn out to be a winner. If you live in a stable environment that doesn’t pressure you to make so much money, you probably would take a pass. But if you have that deep rooted “I wanna make money” desire, you’ll definitely buy into this investment. And what happens? Since this investment isn’t of top quality, you lose money.
That’s why I think that living off your investments is a huge no-no, unless you’re so loaded (like Buffett) that no matter how much money you lose, you still have enough to live on.
The Exit Strategy
I find that too many investors do not have exit strategies. They’ve all planned out how they’re going to buy into a position, but they never plan out how they’re going to exit!
They all say “I’ll buy on the next dip” or “I’ll buy when this 20% correction bottoms out”. Great, what are you going to do after that? The common answer is “I’ll just buy and hold. I’ll see how things go”. That’s a terrible answer. Your plan is only half complete.
As a successful investor, you absolutely need to know how you’re going to get out of a position. List all the possibilities that might happen to the market, and create a plan for each possibility. Only then can you consider yourself “prepared”.
Too many people assume that learning stops the instant college is over. Quite the opposite, in fact. The REAL learning has just begun. All that useless crap about Amazonian tribes? Never going to have to touch that again.
All successful investors are active learners. They read as much as they can get their hands on. They never, ever stop leaning. They have a humble attitude that states “I’m not the smartest guy in the world, and there are so many people I can learn from. I have to go out and find sources (e.g. books, websites) to learn from these people so that I can make myself a better investor.”
Thanks for reading this post! Feel free to stop by The Financial Economist for insights on the markets, the economy, and politics. Troy also writes about how-to invest advice and financial lifestyle advice.