Ten Traits of Successful Investors

Good Investors are made, not born! Upon close examination, we find that there are a few common delineating characteristics that all good investors possess. Why not start inculcating them today?

#1: They know their risk tolerance

Good investors have a high level of self-awareness when it comes to their own risk tolerance levels. They do not invest in assets that exceed their risk taking capacity, as they know that this may drive irrational (fear driven) decisions.

#2: They understand and accept volatility

A clear understanding of the “no risk, no reward” principle is another defining trait of a good investor. Rather than shying away from volatility altogether, good investors take time to understand the risks involved in an investment and accept a certain degree of volatility as “growing pains”

#3: They are decisive

When the time comes to take a decision, good investors act! Hours of evaluation and study are pointless if one cannot eventually make a firm go/no go decision. Indefinitely sitting on the fence only leads to missed investment opportunities, and good investors understand that.

#4: They are “actively passive”

The above oxymoron is a key defining characteristic of good investors! They actively scout good investment opportunities and spend significant time evaluating options and building out their portfolios. However, once an investment has been implemented with a certain time frame in mind, they turn relatively passive and do not frequently churn their investments.

#5: They ask questions

Good investors understand that it’s better to ask a few extra questions than to regret (or get locked into) a poor investment. They are inquisitive, and make sure they gain clarity on all the so called “fine print” – fees, exit charges, lock in periods, risks, alternatives, commissions, premature termination options, and everything else there is to know.   They also conduct their independent research and check back with unbiased sources before taking a final decision. In other words, they educate themselves!

#6: They avoid speculation

Good investors differentiate between “speculation” and “investment”, and avoid the former (although not altogether) and put emphasis on the latter. Buying a stock as a tip from a well-meaning friend (or for any other unfounded reason) is not very different from gambling, and has a 50-50 chance of success. Although it can be fun & exciting when done within limits, speculation never forms the core investment strategy of a good investor – in other words, it never takes the place of solid research and rational judgment.

#7: They keep emotions in check

The best investors are great contrarians and firmly follow the Buffet principle of “buying when others are fearful and selling when others are greedy”. They appreciate that their own emotions (specifically greed and fear) can function as their worst enemies and lead them to take wrong investment calls. Good investors recognize that the “point of emotional capitulation” is also the “point of maximum financial opportunity”, and vice versa. They neither panic, nor rush to capitalize on momentum based trends.

#8: They are realists

Good investors are masters of “viewing situations as they are”. They enter investments with tempered expectations that are in line with long term trends within an asset class. For instance, good stock market investors will buy a stock portfolio aiming to achieve annualized returns of 15-20% over a 5-7 year period. If an unusual, sentiment driven bull market pushes their annualized returns to 50% or more in a year, that may prompt them to rebalance and book profits, but their expectations of the future will not change significantly. Good investors have learned to shut out the noise emanating from news channels (that is primarily meant to sensationalize) and calmly evaluate investment avenues based purely on what data and logic say about the “current situation”

#9: They diversify

It goes without saying that good investors do not put all their eggs in one basket. They spread their assets across multiple investment avenues in line with their risk tolerance and never overextend themselves into one particular asset class just to “ride a wave”. At the same time, they do not over diversify to the point where returns from all asset classes cancel each other out – leading to poor returns!

#10: They think long term (but not too long term!)

Mark Zuckerberg once said – “I like to pride myself on thinking pretty long term – but not that long term”. That’s a good philosophy for investing as well. While “long term thinking” is a core tenet of successful investing, that doesn’t mean that one shouldn’t take stock of things every once in a while. Every now and then we come across clients who haven’t rebalanced their portfolios in years, and this has been to their detriment. Good investors take a long term view on an investment; but periodically check back to see if better options exist within the same asset allocation and risk tolerance thresholds, or whether the investment climate has undergone material changes.