3 Traits You Need to Be a Great Investor

The Characteristics All Successful Investors Have in Common

Investors looking at graphs around a table with an advisor.
••• Prasit photo / Getty Images

There are a handful of things that many great investors have in common. These traits fall into three broad categories:

  1. The right temperament
  2. The ability to value assets
  3. An appropriate understanding of risk

By developing them, you stand a chance at increasing the odds of reaching your financial goals, just as an athlete does by training in a gym.

Investors may look to earn income from dividends,—the distribution of company earnings—or from interest income—earned from interest-bearing holdings like bonds.

1. To Be a Great Investor You Need the Right Temperament

If you strive to achieve good investment returns, you need the right temperament. It is important that you realize temperament is different from knowledge, intelligence, wisdom, and discernment. Investors need patience. In the words of famed investor Warren Buffett, "some things just take time, you can't get a baby in one month by getting nine women pregnant". There is a lot of truth in his statement. 

Being able to tune out the noise is important. This is the ability and willingness to stick to a plan while ignoring the crowd. You need a firm grasp of financial history to know what works. As an example, buying assets for less than they are worth at attractive discounts to net present value (NPV) and then holding to collect the dividends and interest income. You need to have the fortitude of character to remain steadfast.

During the 1990's dot-com bubble, some of the best investors in the world who refused to give in to the insane stock prices of the time—thus appearing like "dinosaurs" and "old men"—were sent letters asking if they were waiting for the second return of Elvis. Don't be swayed by public opinion.

Investors also need the emotional capacity to separate normal market fluctuations from the underlying real value of an asset. If you bought an apartment building in your hometown that generated $50,000 per year in passive income from rents and someone came up to you, offering to buy the place for $100,000, or 2x earnings, you'd likely ignore them or laugh in their face. If the same thing happened in the stock market, many people are apt to panic and accept the deal! It's very hard to get rich doing that.

2. To Be a Great Investor You Need the Ability to Value Assets and Businesses

If you've researched stocks at all, you know it is vitally necessary to possess the ability to calculate the intrinsic value of an asset. It doesn't matter if that asset is a car wash, a government bond, a share of stock, a dry cleaning business in your hometown, or an international hotel conglomerate. Unless you can pull out a calculator and run the formulas yourself, you are always going to be operating at a significant disadvantage to the competition, much akin to a blind person trying to win a sharpshooting contest. 

At first, the math involved can seem impossible, daunting, and downright confusing. However, if you continually remind yourself that all you are trying to do is answer one question: "How much should I pay for $1 of net present value earnings?", you'll be surprised how clear this simple mantra will keep your thought processes clear. The answer to that question can mean rejecting 90 or 95 out of 100 investment opportunities but remember this: it only takes a handful of good decisions to get rich or reach financial independence 

3. To Be a Great Investor You Need An Appropriate Understanding of Risks, Both Implicit and Explicit

Mark Twain once said that history doesn't repeat but it does rhyme. There is, perhaps, no better preparation for managing money and building your net worth than a firm grasp of financial history. There wasn't a fundamental difference between the real estate bubble, the dot-com craze, and the Dutch tulip bubble a few centuries prior. By arming yourself with an understanding of the human psychology that can influence the buying and selling decisions of individual men and women, you can improve your chances of avoiding mistakes that could hurt your family's well-being.

Personally, I follow the mental model approach. A mental model is an idea, a concept, that is used as a tool to help you avoid making poor decisions. Mental models include things like the Horns Effect and Halo Effect, Veblen Goods, The Illusion of Choice, and Information Asymmetry. It may not be evident at first why these concepts are important to business and investing but studying them, adjusting for them, and putting them to work in your own endeavors can help grow your bank balance year after year.

The Balance does not provide tax, investment, or financial services and advice. The information is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal.