I don’t know if you are like me but every year, I try to become a better investor. I look at my weaknesses and try to work on them. Personally, I tend to “gamble” a little bit with my stocks. I’m the kind of guy who has a strong core portfolio and am always tempted to hit a homerun every year.
Two years ago, I tried with RIM… didn’t work out.
Last year, I tried with VNP… another mess.
I guess I’m not a quick learner… since I made another “gamble trade” this year (I’ll tell you in the weeks to come how it is going and I’ll update my dividend holdings as well!).
What is the difference between a strong investor and a goofy one? What makes 90% of the DYI investors underperform the stock market? Is is greed? Lack of knowledge? Or lack of emotional control? What do you think? What makes you a good investor?
Solid Investment Process?
I believe that the very first thing an investor should master is his own investing process. If you didn’t build a strong process where you filter, analyze and pick stocks for the same reasons over and over again, you might be at high risk. Picking stocks because they show a high yield or because you read that 10 analysts are changing their recommendations to “strong buy” is not enough to be successful.
It sucks, it’s boring but you need to study the stock market, read books and make up your mind on how you want to invest. Are you looking for growth? For revenue? For stability or simply to generate additional revenues from your savings? There are several ways to invest and they won’t suit you all. The point is to find an investing strategy that will help you achieve your investing goals in a manner that you are comfortable with it.
I detailed mine not so long ago in this article about double digit dividend growth.
More Money?
Do you believe that rich people are more successful with their brokerage account? When I started investing, I only had $3,000 to invest in my retirement account. I wondered how I could be successful with such a low amount. I thought that if I had $100,000 to invest, I would be a better investor.
Over time, I can tell you it’s far from being true. You will obviously not invest your 3K the same way you would invest 100K but it doesn’t mean that you will have a smaller return. People with a lot of money can be tempted to gamble on more trades since they have more money to play with. They can also lose track of their own strategy by buying too many stocks in the name of diversification. Can you imagine how hard it is to follow 40 stocks?
I like smaller portfolios because they come with a feeling of accountability. Last year, my portfolio returned 1.8% in a hot stock market. The reason was simple; most of my stocks went well but I had a big miss with VNP which lost 70% of its value. So instead of showing a +13-15% return, I saw my profit eaten by a loss on a single stock.
It is so important to stick to your investing strategy!!
Knowledge / Education?
I don’t think that a PhD in economics has better chance at trading than any other investor. I’ve seen so many irrational swings on the market and as much unpredictable news to convince me that a big brain is not required to be successful with the stock market.
As I mentioned above, I truly believe that one must study the stock market and understand how it works before opening a brokerage account. However, it doesn’t mean you need to need a bachelor’s degree in finance, a master in portfolio management and a PhD in mathematics to make money. A good understanding of accounting to read financial statements and understand ratios along with a few books on investing strategy will be enough to start investing. My advice if you are not working in the financial industry is to start slowly with a few thousand in your brokerage account. You will have all the time in the world to invest more in the future.
Time?
Do you believe retirees have better returns than actively working investors? Will working on your investment 2 hours a day make you a better investor? I guess that if you want to do some day trading, it will certainly help! On the other hand, if you select a passive investing strategy such as index investing or dividend investing, you should not need that much time to invest.
I systematically read financial updates on the companies I invest in and actively review them once a year when they publish their year-end report. I believe more in the process of selecting a stock than following them each month to see if it’s the right time to sell or buy more shares!
Emotional Control?
I think one of the biggest factors that will contribute to the success (or failure) of an investor is definitely his ability to control his emotion. During rough periods, just ignore your portfolio. Recessions will happen, bear markets will hit and stocks will drop. Before you make your first trade, you should accept these principles. Once you have accepted them, it becomes almost fun to see how people react and what is being written in the news. It’s the end of the world, capitalism is dead, and the stock market will be flat for the next 20 years. I’ve only been investing since 2003 and I’ve seen this phenomenon twice already.
Funny enough, we are not close to becoming communist yet and gas prices at the pump are still pretty high… I guess the end of the world is not here yet!
Passion?
Like many other things in life, if you are not passionate about finance and the stock market, I doubt you will become a great investor. I think that if you don’t really like investing, maybe it’s just not for you. We tend to become good at what we like (that’s probably why my wife tells me I’m not good with the Dust Buster… lol!).
If I have to put factors in a specific order, I would call them like this:
#1 Solid Investing Strategy
#2 Passion
#3 Emotional Control
#4 Knowledge
#5 Time
#6 Money
What’s your take? What’s the number one factor that will make you a good investor?
The one thing I would add to this is that emotional control also is important in bull markets. When things are skyrocketing, holding on to your investment strategy and objectively valuing your stocks before buying or selling is just as important when things are plummeting.
My biggest problem has been those ‘gambling’ trades. I try to restrict myself to inputting my trade into the system in the evening rather than during the trading day. This gives me a cool down period that will allow me to think about it and cancel the trade if I believe I was hasty in acting. Works when I’m disciplined enough to do it.
I agree that a solid investing strategy is the most important thing when it comes to achieving investing success. When I first started dividend investing I created a set of rules that I always try to follow with each investment decision. It helps take emotion out of my thinking process.
Also, I think you can allocate a small percentage or amount of money to “gamble” with by trying to pick the next big thing. Just make sure if it goes bust it won’t drag down your whole portfolio with it.
I’ve given up taking these flyers. First, it’s a gamble. Read in the G&M in the comment section a while back about people “investing” in Sino Forest, post muddy waters. I suggested it’s the same as going to Vegas and betting on red. That is not investing. Investing should not be gambling. If you wouldn’t invest fifty grand in a stock, why would you invest five? A long term strategy and a disciplined approach is what has helped me the most. Staying away from quick flyers and flavour of the day makes most sense. Slow and steady seems to really win the investment race.
Mike, I totally understand you. I made the same gamble trades in my portfolio too. Last week I run the numbers for 2012 and I lost 4,000 (9% loss)! That was an eye opener. Considering that I started investing late, have a small portfolio, I cannot afford a loss like that! So now I think I learned my lesson and I am committed not to take any trade which goes against my plan or strategy, which is dividend stocks, covered calls and selling puts against stocks I want to own (dividend stocks).
Good article! In my opinion the number one factor for successful investing is knowledge. The more I know, the better equipped I will become over time.Blogs like this one and others help a lot.