Successful investing is on the minds of every American that wants to expand their income by taking advantage of the stock market. But what does being a successful investor really mean? Ask ten different people and you’ll probably get ten different answers.
Some say it is knowing the right time to buy and sell. Others claim it’s all about investing as much of your extra income as possible. The bottom line is that while there may be different approaches to successful investing, but a combination of factors can make you the very best.
Before determining and talking about the most important factor of them all, let’s look at three that will determine your achievements!
In the world of investing, knowledge will get you very, very far. If you’re a beginner, you’ll need knowledge to propel you further. If you have experience, you still need knowledge in order to stay in the game.
You must strive to learn as much as you can about how the stock market works on top of analyzing potential investments. Being passive is not going to get you very far as you need to have good reasons for buying and selling certain stocks.
The best place to start is to learn from the greats and since you likely won’t get the chance at a one on one Q&A session, the next best thing is reading their books. Peter Lynch, Warren Buffett, and Benjamin Graham have a wealth of knowledge that they’ve shared over the years, plenty of it is documented in a selection of books. Take advantage of all of them in your spare time!
On top of that look at credible online resources. Some things have stayed the same over the years, but the stock market is a well-oiled machine that is in constant change. As such you have to keep up with the times. And that means scouring the internet for the best resources possible.
The stock market has been proven to be a reliable space to create wealth, but only if you stick to it for the long run. Moves of 20% or more in a single year aren’t unusual, but skittish people will see this as a sign that they need out as fast as possible. That’s when they panic and start selling, which is the absolute worst thing you can do!
If your entire plan is to capture big price movements, causing you to jump in and out of stock positions, then you’re not taking advantage of the long-run returns.
It is estimated that the S&P 500 has generated annualized total returns of roughly 10% over long periods. Over a period of 30 years, this means you’ll be looking at a return of 1,500%.
So, without long term focus you’ll be losing out on generating insane amounts of money. Even when experiencing a massive drop, you have to remind yourself that you’re taking part in a marathon, not a sprint.
You wouldn’t be able to use your knowledge and have long term focus if it weren’t for one thing: money. Saving money and allocating it to your brokerage account is paramount. Without this, it’s like going fishing without a lure or bait- what’s the point?
But the most successful investors know they have to also prioritize a savings account. That’s so that in the face of an emergency you won’t derail your investment strategy. This also ties in with our earlier point in which pulling out too soon could make you lose thousands of dollars- no matter what the situation is, you need to stay focused.
Making sure you have enough emergency savings to help carry you through a rough patch is a priority for a successful investor.
The Most Important Factor of All
Knowledge, long term focus, and saving money are all important factors, but you need one last ingredient for the perfect recipe. And that’s temperament. Without this, the building blocks of being a successful investor will just fall apart. That may be because all three elements combined lead to good temperament or because temperament can lead you to better understand the other three factors while applying them.
Alright, so let’s break it down further! What is the right temperament for an investor? Well, according to Warren Buffett, “you need a temperament that neither derives great pleasure from being with the crowd or against the crowd.”
We are all emotional beings. Knee-jerk reactions are part of our DNA. What Mr. Buffett means by that quote is that we all have to apply logic before all else. You need to look at what the herd is doing without necessarily applying their mentality. You need to trust your knowledge and analyze your decisions and your path even if your ‘gut feeling’ says otherwise.
Your gut feeling might say it’s a good idea to put money on the market when prices are rocketing. That’s not really your gut. That’s just the fear of missing out. If everyone else is making money, why shouldn’t you? Alternatively, we’re also predisposed to sell before things get much worse during a period of plunging stocks.
Here are two examples you need to consider. What would have happened if you would have decided to sell at the height of the financial crisis in order to stay on the sidelines for a year? You would have lost 70% of gains, that’s what! What about throwing all your savings into a Nasdaq index fund at the height of the dot-com bubble in 1999? Worse, you would have had to wait 20 years just to get back to even.
That’s where temperament comes in. It allows you to put your money in high-quality stocks or index funds over time. Ignore the crowds. Ignore that need to go with the flow and follow what everyone else is doing. Because, quite frankly, if it worked then we would have all been millionaires by now!
How to Work on Your Temperament as an Investor
Working on your temperament is one of the hardest things you can do as an investor. It’s pretty difficult to ignore our basic human instincts in favor of “winning” at the stock market. But that doesn’t mean it’s not impossible.
Before every decision it’s time to reflect back on your knowledge. Remind yourself. Is it a good idea to start selling out of panic despite knowing that crashes are a normal part of the stock market. Should you buy an overhyped company or should you refer back to the basics of stock analysis?
Secondly, always learn from your mistakes. If you don’t then you’re basically throwing away a free lesson. Yeah, reflecting on your mistakes can be a real pain (also cringe-inducing!) but it’s a necessary part of the process. First off, everyone makes mistakes. That’s just a part of life. Furthermore, you should learn from the mistakes of others. While going down the beaten path, remember to analyze your surroundings as well!
The bottom line is that the stock market is the place where emotions have to be ignored. If your temperament doesn’t fit, make it!