6 Attributes of Successful Investors

6 Attributes of Successful Investors

6 Attributes of Successful Investors

Hello folks! Thanks for stopping by The Green Swan. Today I wanted to spend some time reflecting back on my investing past and give what I consider are the 6 attributes of successful investors.

First, let me start by giving an overview of my background. I’ve been in the finance field for 10 years. While I started in a role at a community bank, my career has taken me through an evolution of roles working with small businesses, middle market clients, and now large corporate companies. This has given me vast experience in seeing deals and transactions of varying sizes and differing viewpoints and considerations.

My role has lent itself (pun intended) to having an inside look at over a hundred completed or attempted/considered acquisitions and transactions. Many of these deals required deep dives into the respective companies and business operations including due diligence sessions with top executives.

Additionally, in recent years, my siblings and I have looked into numerous acquisition opportunities for us to invest in personally. If you’ve been following the blog for a while, you’ll know that we recently closed on an acquisition a few months ago.

While I am not disillusioned that many will see a 10 year career as woefully short of being able to provide thoughtful advice, and others will view 10 years as still in the beginning phase of a meaningful career, I do think my experience is somewhat unique and has allowed me to draw important conclusions.

The 6 attributes of successful investors that I’ve outlined below have been crafted with the purpose of helping those considering investing in individual companies and/or looking to buy or start their own small business like my siblings and I.

  1. Know Your Numbers

One of the more valuable lessons I learned just starting out is how important it is to be able to know and understand financial statements. It may sound simple, but I’m not just saying you need to be able to comprehend some common figures such as EBITDA and ratios such as leverage and the trends thereof; it goes much deeper than that. The best and brightest folks I’ve been around have been able to pick up financial statements and understand almost immediately the financial condition of the company, some of the main issues and how it will do in the future. And the basis is being able to understand how cash flows through the business and how that is represented in the financials.

Understanding the numbers and the ability for the company to generate cash flow is the premise for determining present value.

  1. Assess Strategy

Assessing strategy is difficult and multi-faceted. It starts by being able understand the company and what it does to make money, the industry in which the company operates and the competitive advantages the company has over the competition.

This can be applied to companies large and small. As an example, I’ll apply this attribute to the Payday Loan industry with which I recently discussed some of the issues it is facing. If you were in the market to buy a payday loan company (and few are these days), whether a national operator or local, you’d want to understand the products offered (payday loans, installment loans, title loans, etc), how those are being impacted by local and federal regulations, a vision of what the industry will look like in the future, and how you’ll fit into that future picture with respect to competitors.

  1. Finding Edge

This may be most easily described as finding your sweet spot and making the most of it. I’d compare this to the story of six MIT students who used card counting to make millions in Vegas, popularized by the book Bringing Down the House by Ben Mezrich. These students were able to calculate the odds at the table (their edge) and bet appropriately. Translating this to business, successful investors are able to find an edge and “bet” or “invest” appropriately to drive sustainable long term success.

Another great book I’d recommend is by Ed Thorpe titled Beat the Dealer where he explained his means to gain edge and his betting philosophy.

  1. Distinguish between Common Sentiment and Fundamentals

This is key and a primary factor in being able to make money. Fundamentals are used to estimate the future financial performance of a company. Value supported by fundamentals can be seen by sales growth, improving operating margins, etc. On the other hand, sentiment and expectations of a company are implied by the enterprise value as determined by the share price for a publicly traded company or list price for a small business available for sale. Investors make money by having a viewpoint that is divergent from common sentiment and what current price suggests.

  1. Reassess Your Beliefs

Successful investors are able to effectively reassess their previous viewpoints, determining what has changed or was assessed incorrectly, and adjusting their go forward plan. My career experiences have benefited from actively seeking out information or views that are contrary to popular belief to help me fully assess an opportunity.

Per Philip E. Tetlock and Dan Gardner’s book Superforecasting: The Art and Science of Prediction, beliefs are hypotheses to be tested, not treasures to be protected.

  1. Avoid Heuristics and Biases

Recent decades have produced significant research into behavioral biases. One of the primary influencers in this field has been Daniel Kahneman and I’d strongly recommend his book Thinking, Fast and Slow.

Heuristics (rules of thumb) have associated biases which can result in misjudgment. There is a long list of heuristics and biases and successful investors can not only acknowledge and identify their presence, but navigate around them.

Thoughts?

Do you invest in individual company stock or have your own small business? Let me know what you think of the 6 attributes of successful investors. Have I missed any?

Thanks for taking a look!

The Green Swan

Work Harder, Work Smarter, Retire Earlier and Find Your Beach

 

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Martin - Get FIRE'd asap

Don’t put yourself down there Green Swan. You may not have a lifetime career worth of experience……yet, but 10 years is nothing to sneeze at and it looks like you’ve had plenty of variety in what you’ve done already. Totally agree that understanding the fundamentals of finance is vital in being able to know where your financial position is throughout your life. Great post mate.

Jon @ Be Net Worthy

Nice post GS! Ten years of seeing deals come together and fall apart is a good deal of experience in my book. And, I think the list is very good. If you have a good handle on this six elements of a deal, then you should have a very good idea of the current financial health, future prospects and where you could add value for the business.

Mr. PIE

Good Morning GS.

No business endeavors for me. I also don’t own individual stocks other than a brief moment when my company stock options vest. Only to be then sold with a few clicks of the mouse.

For many investors, the best thing is arguably to do nothing. Don’t mess with the portfolio, avoid the incessant tweaking and adjusting. In the words of Bogle, don’t search for the needle, just buy the haystack.

The work of Danny Kahneman was visionary. Guess that’s why he got a Nobel Prize!!. That whole area for me,out of the 6 you mentioned, is the most important for any investor.

JW

Thanks, Mr Pie. Besides the small business venture of mine, I too rely on buying the haystack (what a good analogy!).

Yes, I loved his book and would definitely recommend it to everyone! Talk about eye opening!

Thanks for the comment.

Josh @MoneyBuffalo

That’s awesome that you have this experience. #1 is important. At my former company, one of the getaways all the mid-level and senior management folks took, when selected to be “one of the bosses” was a crash course at a business school and one of the topics was learning how to read & understand the company financial statements. I suppose that way they would have a better understanding of the stock options they would receive as part of their compensation package.

JW

Interesting policy by your former employer. I hadn’t heard of that before but it seems like a good policy so they fully understand the business. Thanks for sharing, Josh!

Stefan - The Millennial Budget

Being able to reassess your beliefs is a big one! Too often people may purchase an individual stock based on historical evidence and something changes in the business or sector and they lose money. 10 years of experience, too me, is a lot so nothing to sneeze at. Keep trucking along!

Full Time Finance

With individual stocks especially knowing the details are important. Assets can be inflated by showing them under the category good will which is really an intangible like brand value. Earnings too can be manipulated by changing accounts receivable,payable, or even preforming expenses to capital rather then operating. Your post hit the nail on the head. Comparison to like companies is key to getting a true sense of what the numbers mean. I can only comment on individual stocks though, I haven’t personally purchased a small business.

Andrew

Green Swan,

Great discussion. Love your point of view from the community bank perspective. You’ve probably seen some pretty crazy companies in your career!

I definitely agree with your first point about knowing numbers. I think the ability to read financial statements is a great skill for anyone to have. After all, accounting is the language of business! I actually majored in accounting in college and looking back, I wish the classes had focused more on reading and interpreting financial statements than bookkeeping and preparing financials.

I think another attribute of successful investing is high emotional control. Often times, it’s not the investors with the highest IQ that generates the best returns. That’s why I have said that investing is often the ultimate psychological game.

Best,

Andrew

JW

Thanks, Andrew! I received a Finance degree but I also took a lot of extra accounting classes and even yet it took years of actual work experience to really understand how to read and understand the statements. It’s a very important language to learn!

Good point on the emotional control.

Thanks for the great comment, Andrew.

ESI Money

I’ll add a couple for consideration:

Patience — you can’t be a great investor if you are impatient, especially if you’re trying to build wealth over the long-term.

Determination — You have to know what you believe, be set with your strategy, and see it through despite what challenges may occur. And you need to know the difference between just a momentary setback and when it is actually time to call it quits. The 2008 market crash comes to mind. Those who saw it through have done quite well since.

FinanceSuperhero

Good suggestions, ESI. Patience is a difficult skill to master as an investor.

My investment approach is best suited for simpletons who don’t understand nor care to learn about many of the factors you cited, JW. That said, a little analytical thinking doesn’t hurt.

Matt @ Optimize Your Life

Great post, JW. I am big on avoiding biases and am a huge fan of the work that Kahneman and the other behavioral economists have been doing. I recently saw a list of books that Obama recommends everyone read, and Thinking Fast and Slow made the cut.

Personally I have avoided investing in individual companies up to this point, which helps avoid some of the biases and heuristics that can cause problems for people.

Mustard Seed Money

10 years on the job means that you probably have about 20,000 hours of experience. Based on Malcolm Gladwell’s book you have world-class expertise two times over 🙂 Don’t sell yourself short!!! Awesome post. Thanks for sharing.

JW

Ahh nicely done pointing that out. I liked that book and there is something to be said about the 10,000 hour threshold. Thanks for the great comment, Mustard Seed.

Finance Solver

Great post GS! After going through my financial statement analysis course, I’m very convinced that knowing the strategy of the company is the most important thing to do when deciding whether to invest in a company or not. The strategy slows so well into company’s financial statements and can tell a lot about how their financial future will look like.

I know that I need to do a better job at doing this but sometimes when I see those 100+ pages of 10-K information, I normally just stick to index funds and never let go 🙂

JW

I read 10k and 10Q statements as part of my day job (I know, fun…) And can confidently say they just scratch the surface of what you need to know before investing, in my view. So I hear you about sticking with index funds :)!

Thanks for the comment, Finance Solver.

AustralianDividendInvestor

Nice list! My biggest struggle is definitely distinguishing between sentiment and fundamentals. Even to the point where I know something is sentiment based, not fundamentally based, but I still find the sentiment invading my thought process to the point where I start second guessing myself.

After all, how do I know if I’m being contrarian and correct or if the market is trying to tell me something?

The one thing I’d add to the list is knowing when I’m out of my element. I’ve certainly benefitted in the past from an ability to put things in the “too-hard basket” and move on to something where I think I have an edge.

JW

Great point on market sentiment invading your thought process. Hard to overcome that, but it’s important to do the research to the point where your confident in your analysis.

Thanks for that addition! I agree, it helps to stick with your knitting.

Thanks for the great comment, ADI!

FinanciaLibre

Nice list here, JW.

I mostly agree, though I’d modify your last point slightly. Avoiding biases is certainly a valuable approach. However, understanding that biases exist among investors, recognizing what those biases specifically are and perceiving how they tend to manifest opens many doors for profit to the savvy investor.

If investors can be anticipated to make systematic valuation errors, and those errors can be profitably exploited, then avoiding bias in one’s own portfolio is just half the equation – taking advantage of bias in others’ portfolios is a powerful means of juicing returns.

Thanks for the good read!

earlyretirementnow

I’m more of an index investor and even within that I don’t try to time the market much. But all attributes still apply: Know the numbers: My own balance sheet and cash flow. Earnings in the S&P500 overall. Earnings yields in other countries. How attractive are bonds relative to stocks (uhm, not very), etc.
So, all the attributes, all the caution about behavioral biases apply here too. I would almost go so far and say that these are “6 Attributes of Successful PEOPLE” if applied to life in general.
Anyway, great list. Great post, as usual!
Cheers,
ERN

amber tree

Good points.

Not so long ago, I needed to apply point 5 to my options trading. I had a very strong conviction that the summer would be the time of the big crash… By September I cut my losses and now I recover and move on.

Financial Slacker

Great list, Green Swan.

Our backgrounds are somewhat similar. I spent many years managing mergers and acquisitons for the companies I worked for and recently, I’ve been evaluating companies to purchase for myself.

The biggest challenge for me has been looking at companies operating in industries that I’m less familiar with. In these cases, I can’t rely on my experience. But while I may not be as comfortable in these industries, I am also not bringing a bias to the analysis.

Thanks for putting this together.

JW

Yes, similar backgrounds for sure. Thanks for sharing that!

That’s an interesting point. It requires a lot more work on the front end to get comfortable with that new industry, but you’re coming in with fresh eyes and a clear perspective all while relying on your previous deal making experience.

That’s actually what happened with the business we just bought…a company in an industry we had no prior experience or knowledge of but after significant due diligence it turned out we liked it quite a bit.

Thanks for the great comment, Financial Slacker!

TheTirelessWorker

Absolutely spot on GS.

That was my exact feeling as I was reading through this. Wonderful and absolutely accurate post on what a successful investor should posses. It is vital that every investor knows their personal weakness and how to adapt to it. I think this is one of the biggest problem yet least talked about by most people. It is not some holy grail method but their strategy and psychological beliefs that affect their returns the most. I would say this is a must read for every aspiring investor!

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