3 Attributes Successful Investors Have In Common
Successful investors come from diverse backgrounds, each with their own ventures, perspectives, and personalities. Yet, delving into numerous books, absorbing podcasts, and immersing myself in the intricacies of investment, I reached a pivotal realization.
Nearly every successful investor share similar principles that underpin their achievements. While their stock holdings and industry preferences may differ, they are united by a core ideology.
My foray into investing commenced roughly six years ago, just before the tumultuous 2020 stock market crash. In that span, I gleaned the vital lesson that markets ascend but also plummet significantly.
In a prior post, I cautioned novice investors about the perils of acquiring erroneous knowledge, emphasizing its potentially ruinous impact. That lesson that we need to avoid is thinking that markets only go up.
I count myself fortunate to have experienced a humbling market downturn, witnessing my portfolio shrink by nearly 50%.
Fortunately, this setback occurred early in my investment journey when my portfolio size was modest compared to its current scale. It proved to be an invaluable lesson, one that I am grateful for, as it instilled in me the resilience to hold onto my investments without succumbing to panic.
Subsequently, I honed my strategies to enhance the likelihood of successful investment outcomes while also learning from costly mistakes. Most notably, I observed 3 recurring attributes among successful investors that bear practical efficacy.
Successful Investors Are Contrarians
It’s widely observed that successful investors often exhibit a contrarian mindset, one that diverges from prevailing opinions. Logically speaking, this trait holds significant importance in the realm of investing.
After all, merely following the crowd doesn’t pave the way for outperforming the market. It rather sets the stage for average returns and mediocrity.
When stocks fall out of favor, their prices typically decline. However, it’s essential to discern that price and value aren’t synonymous. While a stock’s price is what you pay for it, its value encompasses what you receive in return. Many investors, fixated on ticker symbols often lose sight of this crucial distinction.
Stocks represent stakes in real businesses, inherently possessing tangible value. Yet, when a business loses favour, its share prices often plummet. Sometimes diverging significantly from their intrinsic worth, presenting a mispriced asset.
This ability to logically disentangle market sentiment from a company’s fundamentals is what distinguishes successful investors from the average. They possess the acumen to think independently, free from the sway of others’ opinions.
Reflecting on my initial steps into investing, I unwittingly relied on recommendations without conducting thorough research. In hindsight, those recommendations proved to be disastrous. Resulting in substantial losses, with some investments plummeting by over 90%. Notably, one stock that I thankfully no longer own eventually went bankrupt just last year.
It wasn’t until I delved into understanding business valuation and conducting my own research that I began to witness more favorable outcomes. This shift not only enhanced my individual stock selections but also bolstered the overall performance of my portfolio.
This serves as a reminder that blindly following recommendations or market trends is ill-advised. It pays dividends to cultivate the ability to think critically and independently.
Successful Investors Are Cheap
It’s a well-established fact that successful investors tend to be frugal. They have a keen aversion to overpaying for anything. Delving into numerous books, autobiographies, and interviews, it’s evident that many renowned investors embrace a thrifty mindset.
They eschew extravagant displays of wealth, often opting for modest homes and vehicles. What unites them is their inclination to invest in items of value and their philanthropic inclinations.
But how does this penchant for frugality translate into success in investing?
Essentially, it comes down to avoiding overvaluation when acquiring businesses. Successful investors seek out stocks that are undervalued, often seizing opportunities when these stocks fall out of favor.
The likes of Warren Buffett, Charlie Munger, Peter Lynch, Mohnish Pabrai, Howard Marks, and Nick Sleep, among others, are known for their knack for identifying undervalued businesses.
Investing in undervalued stocks provides a substantial margin of safety, allowing investors to acquire assets at prices significantly below their intrinsic worth. Such investments offer a favorable risk-to-reward ratio, which can lead to significant gains.
While many average investors panic and sell when stock prices plummet, successful investors understand that unless a company’s fundamentals have irreversibly deteriorated, prices will eventually align with their true value.
Human psychology often gravitates towards herd behavior, flocking to stocks with rising prices. However, from a logical standpoint, as stock prices soar, the risk increases while potential returns diminish.
Conversely, when stock prices decline, the risk decreases, and the potential for substantial returns grows, assuming the underlying business remains unchanged.
In essence, being frugal often pays off, particularly in investing.
Successful Investors Focus On Capital Preservation
Buffett’s first rule of investing is to “never lose money” and it highlights the importance of capital preservation. You never want to find yourself starting from the beginning.
In the quest for quick wealth, individuals often jeopardize their hard-earned assets for excess gains. As your portfolio snowballs, the prospect of beginning afresh becomes increasingly unpalatable.
The rationale behind successful investors’ pursuit of undervalued, mispriced stocks isn’t solely rooted in profit maximization. Rather, it’s about minimizing the risk of capital erosion—a concept known as the margin of safety.
Echoing Charlie Munger’s axiom to “always invert,” prudent investors meticulously consider potential pitfalls before committing to an investment. They meticulously evaluate the downside risks alongside the potential gains.
While many fixate on the allure of potential profits, the crux lies in assessing the potential losses. This aspect is often overlooked by novice investors.
Successful investors shun reliance on luck, instead, favoring a calculated approach based on probabilities. They engage in investment ventures only when the odds are stacked in their favor.
They’re unswayed by the euphoria that accompanies market rallies, resisting the temptation to chase soaring stock prices driven by the fear of missing out.
While it may seem enticing to ride the wave of a surging stock, the accompanying risks are equally substantial. Successful investors refrain from succumbing to such volatile market dynamics, preferring to observe from the sidelines during irrational market exuberance.
Conversely, they seize opportunities during market downturns when sentiment turns excessively pessimistic. It’s crucial to remember that as long as a company’s fundamentals remain robust, a declining stock price renders the investment less risky.
In such scenarios, the risk of capital loss diminishes considerably compared to when market sentiment is overly optimistic. As Buffett aptly warns, “you pay a very high price in the stock market for a cheery consensus”.
Key Takeaways
- Successful investors distinguish themselves by embracing a contrarian mindset, avoiding herd mentality. They recognize the disparity between stock price and value, prioritizing independent analysis over market sentiment.
- Successful investors capitalize on undervalued stocks, leveraging a margin of safety to mitigate risks and maximize returns.
- Successful investors prioritize capital preservation over excessive gains, focusing on undervalued stocks to minimize risks. They adopt a cautious, calculated approach, avoiding herd mentality and favoring strategic investments.
Incognito Wealth – Investing Tools
Need help with investing in the stock market or personal finance? Visit my Etsy store for digital excel templates. Simplifying finance so that everybody can reach financial independence.
Incognito Wealth - Financial Independence One Investment at a Time