Keys to Successful Investing


Long-term investment success is a function of two things:
the right approach and the right person.

The Right Approach

There are many ways to make money, but this doesn't mean every way is equally valid.  In fact, I believe strongly -- and there is ample evidence to back me up -- that the odds of long-term investment success are greatly enhanced with an approach that embodies most or all of the following characteristics:

  • Think about investing as the purchasing of companies, rather than the trading of stocks.
  • Ignore the market, other than to take advantage of its occasional mistakes.  As Graham wrote in his classic, The Intelligent Investor, "Basically, price fluctuations have only one significant meaning for the true investor.  They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.  At other times, he will do better if he forgets about the stock market."
  • Only buy a stock when it is on sale.
  • Focus first on avoiding losses, and only then think about potential gains.
  • Invest only when the odds are highly favorable -- and then invest heavily.
  • Do not focus on predicting macroeconomic factors.  "I spend about 15 minutes a year on economic analysis," said Lynch.  "The way you lose money in the stock market is to start off with an economic picture.  I also spend 15 minutes a year on where the stock market is going."
  • Be flexible!  It makes little sense to limit investments to a particular industry or type of stock (large-cap growth, mid-cap value, etc.).
  • Shun consensus decision-making, as investment committees are generally a route to mediocrity.&nbdp; One of my all-time favorite Buffett quotes is, "My idea of a group decision is looking in a mirror."

The Right Person

The right approach is necessary but not sufficient to long-term investment success.  The other key ingredient is the right person.  My observation reveals that most successful investors have the following characteristics:

  • They are businesspeople, and understand how industries work and companies compete.  As Buffett said, "I am a better investor because I am a businessman, and a better businessman because I am an investor."
  • While this may sound elitist, they have a lot of intellectual horsepower.
  • They are good with numbers -- though advanced math is irrelevant -- and are able to seize on the most important nuggets of information in a sea of data.
  • They are simultaneously confident and humble.
  • They are independent, and neither take comfort in standing with the crowd nor derive pride from standing alone‚Ķbargains are rarely found among the crowd.
  • They are patient.  ("Long-term greedy," as Buffett once said.)  Templeton noted that, "if you find shares that are low in price, they don't suddenly go up.  Our average holding period is five years."
  • They make decisions based on analysis, not emotion.
  • They love what they do.

* cited from: motley fool article By Whitney Tilson ( July 17, 2001