7 Traits of Phenomenal Investors

Reuters blogger Felix Salmon posted a video last week arguing against attending meetings like the Ira Sohn conference in New York -- an annual gathering in which some of the world's richest hedge fund managers talk about themselves and share an investing idea or two.

These people are just talking up their books, says Salmon. Sales pitches. Infomercials. As he puts it: "If you want to go there and spend your money and eat, like, rubber chicken, and rub shoulders with plutocrats, then all power to you. But don't pretend that you're doing this for your investment portfolio."

Joe Weisenthal of Business Insider came back with a thoughtful rebuttal. Chasing stock tips might be futile, he said, but "It's not often that you get to hear the thought process and reasoning employed by these financial professionals."

Having attended a few of these conferences, and crashed a few hedge fund meetings, I think Wiesenthal's spot-on. (Salmon conceded as much.) The value of the meetings doesn't lie in the pitches, but in learning what kind of people successful investors are. How do they work? What do they read? Where do they get their ideas?

Here are seven common traits I've noticed among some of the world's best investors.

1. They learn from each other
The Securities and Exchange Commission makes all money managers running more than $100 million report their stock holdings every quarter. It's called a 13F filing. I've come to suspect that most money managers don't find this burdensome at all. They love seeing what the competition is up to.

Value investor Mohnish Pabrai says he spends a good amount of time poring over these filings in search of investment ideas. "I rarely use computer screens to find ideas," he said last year. "I am looking at 13Fs from folks I respect quite a bit." You could have used this filing, for example, to see that Pabrai was buying shares of Wells Fargo in early 2009, before it tripled. 

2. They use checklists
People usually screw up because either they don't know what they're doing, or what they're doing is so complex that they become forgetful. The airline industry has nearly eliminated the latter with a simple tool: checklists. The rate of human error in airline accidents fell precipitously after Boeing introduced pilot checklists in the middle of the 20th century.

Great investors are starting to catch on -- an outgrowth of Atul Gawande's excellent book The Checklist Manifesto. Several now use investment checklists before making new investments in an attempt to eliminate errors.

3. They don't watch CNBC
And if they do, it's on mute. Great investors tune out the noise. To take a dig at my own profession, the majority of financial news and analysis is not only useless, but dangerous, capable of swaying sound logic with fear and hype. Black Swan author Nassim Nicholas Taleb put it best: "The calamity of the information age is that the toxicity of data increases much faster than its benefits."

4. They aren't slaves to the calendar
I bought Microsoft about a year ago. It's done nothing since. A friend of mine who works at a hedge fund recently teased me sarcastically, "How's that working out for you?" Didn't bother me a bit, I said. I can wait.

He went on to tell me about the pressures of his hedge fund. Clients want monthly, weekly, and sometimes daily trading reports. He can't wait. He needs results now.

This slave-to-the-calendar mentality is one of the surest roads to mediocrity, if not ruin. (I hope he doesn't read this.) The greatest investors make it clear that they won't sacrifice long-term performance for short-term window dressing. Why would they? They're out to earn as much as possible.

Google's (Nasdaq: GOOG  ) IPO prospectus has a great quote: "A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour."

5. They're diverse learners
Charlie Munger likes to talk about worldly wisdom -- mental models collected from diverse disciplines, entwined together to solve problems. It's the only way around the classic man-with-only-a-hammer-sees-every-problem-as-a-nail dilemma.

It's also vital in investing. The biggest challenges money managers come across have nothing to do with finance. Psychology, cognitive biases, geopolitics, engineering, history, and even anthropology can be some of the most practical skill sets.

Barry Ritholtz of Fusion IQ just wrote a great op-ed in The Washington Post regarding "five fields that are hugely helpful to asset management." Ritholz lists historians, psychiatrists, trial lawyers, mathematicians and statisticians, and accountants. Anything but an MBA, really.

6. They focus on their mistakes more than their successes
Every investor will inevitably make mistakes. What happens afterward distinguishes the hacks from the pros.

Pabrai, mentioned above, spends more time at his annual meeting explaining what he did wrong than what went well, even in years when his returns are off the charts. His investors love the humility, and most importantly, he learns from the mistake (adding it to his checklist!) to prevent recurrences. Those who bury and ignore mistakes are bound to repeat them.

7. They're small
Berkshire Hathaway
(NYSE: BRK-B  ) is the best example. One of the largest investment funds in the world is run by two people: Warren Buffett and Charlie Munger.

This skeleton-crew setup is actually common among great investors. Some of the world's best investment funds often consist of a manager, a secretary, and an accountant. That's it.

That's all you need, really. Funds that employ legions of analysts and lawyers are usually doing really complicated things, increasing the odds that something terrible will happen. Investing isn't a game in which 100 junior analysts beat one seasoned, emotionally stable investor.

Quite the opposite, actually.

Check Fool.com every Tuesday and Friday for Morgan Housel's columns on finance and economics.

Fool contributor Morgan Housel owns shares of Berkshire Hathaway. Follow him on Twitter@TMFHousel.The Motley Fool owns shares of Berkshire Hathaway, Google, and Wells Fargo. Motley Fool newsletter services have recommended buying shares of Google and Berkshire Hathaway. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (17) | Recommend This Article (66)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 31, 2011, at 6:13 PM, CaptainWidget wrote:

    Great article. That's the kind of stuff I come to this website for. Thoughtful analysis of what people who are much smarter than me are doing, and how I can parasitically drain their smarts into my portfolio.

  • Report this Comment On May 31, 2011, at 6:14 PM, GreenPhotog wrote:

    Thanks Morgan. Uplifting article that is very settling.

    I was a nervous ninnie a short time ago and every bump in the road was a sell moment. Whetehr the stock gained or lost it was reason to toss it as a bad choice.

    Now, I look at Fools' top investors- and analysts- and buy what looks good for the long term. I'm sleeping again knowing checking the stocks on more-or-less casual basis will reap me rewards in the long term.

  • Report this Comment On June 01, 2011, at 5:34 AM, daveandrae wrote:

    I thought I would see the words Faith, Patience, and Discipline in your article but I never did. These are the simple attributes every great equity investor has in common.

    Everything else, in my opinion, is commentary.

    Truth be told, the dumbest person in the world dollar cost averaging $5,000 a year into an s&p 500 index fund over a thirty year time horizon will still amass well over two million dollars. In doing so, he will have left his peers in the dust and also obliterated 75% of the people that are professionally managing money, today.

    Most people are completely unaware that more than 50% of the actively managed mutual funds that were available thirty years ago, are no longer in business, today.

    All of this assumes ,of course, that the investor never loses Faith in equities, has the Patience to hold onto the investment, long term, and the Discipline to reinvest his dividends, pay the taxes out of his pocket, and add the same amount to the fund year end and year out. This is especially difficult during a "Big Sale", which the journalism loves to call a "bear market".

    Unfortunately, most people do not have the faith, patience or discipline to do these simple things. This is yet another reason why, in spite of overwhelming odds, (the s&p 500 was trading around a market price of 100 thirty years ago) most people are not wealthy.

  • Report this Comment On June 01, 2011, at 7:09 AM, JCashForever wrote:

    daveandrae,

    excellent comment.

    I would go one step further and say that those three traits judiciously applied in our everyday activities would make all of us richer...not just monetarily, but spiritually, professionally, and emotionally as well.

    "With love, with patience and with faith, she'll make her way..." -- Wonder, Nathalie Merchant

  • Report this Comment On June 02, 2011, at 10:45 AM, buddylee59 wrote:

    So many good points in the article, and the comments as well. Thanks Morgan and commenters.

  • Report this Comment On June 02, 2011, at 1:27 PM, PeyDaFool wrote:

    "Truth be told, the dumbest person in the world dollar cost averaging $5,000 a year into an s&p 500 index fund over a thirty year time horizon will still amass well over two million dollars."

    Though I certainly endorse this strategy, at an 8% historical rate of return, I calculate $622,529.14 as your finishing rate after a 30 year time horizon.

    $622,529.14 is nothing to scoff at, of course, but it's not "well over two million dollars."

  • Report this Comment On June 02, 2011, at 8:03 PM, Mstinterestinman wrote:

    My goal is 12 to 14% annuallized I am trying to beat the market by simply buying good and great companies when MR market puts them on sale.

  • Report this Comment On June 02, 2011, at 8:35 PM, daveandrae wrote:

    My math was a bit off.

    5,000 a year over thirty years comes out to approximately 1.7 million pre tax. This assumes, of course, that all dividends were reinvested and all income taxes were paid from another source.

    I should note that this strategy was back tested assuming the investor started dollar cost averaging at the worst possible time. Right before the crash of 1929. Thus you are incorrect when you assume that the historical rate of return over a thirty year period is 8%.

    The INVESTOR'S return on equity capital using this strategy from 1929 to 1959 was much higher. A whopping 13% annualized. Feel free to look it up for yourself in Stocks for the Long Run by Jeremy J. Siegel.

    This strategy reinforces the simple fact that there is absolutely, positively, NO correlation between "investment performance" and Investor Return.

    None whatsoever.

  • Report this Comment On June 02, 2011, at 11:29 PM, PeyDaFool wrote:

    "5,000 a year over thirty years comes out to approximately 1.7 million pre tax."

    No, actually it doesn't. Since we can't choose to begin investing at the bottom of a bear market, you can't cherry pick the perfect date to begin dollar cost averaging your retirement.

    Nice try, but you're still well below one million dollars. Using any other figure than a 8% historical return is fooling yourself into believing you can beat the market by investing in a fund comprised entirely of the S&P 500. It's simply unrealistic.

  • Report this Comment On June 02, 2011, at 11:31 PM, PeyDaFool wrote:

    "Thus you are incorrect when you assume that the historical rate of return over a thirty year period is 8%."

    Dude, where do you come up with this stuff? We're talking about the future, not picking our specific 30 year periods out of the past.

    Look, your strategy is sound, but just admit you're math is completely off base.

  • Report this Comment On June 03, 2011, at 6:39 AM, daveandrae wrote:

    This will be my last response.

    Put your glasses on and re-read the first post.

    I did not say that the investor began dollar cost averaging at the bottom of the 1932 bear market. I said the hypothetical investor started dollar cost averaging at the TOP of the 1929 bull market.

    It only stands to reason that a falling market price, must also mean a rising dividend yield. Thus, each subsequent purchase only enhanced the total rate of return.

    In fact, the annualized rate of return from the TOP of the last secular bull market over the next thirty years was also, well above 8%. From December 1972 to November 2001, the annualized rate of return from the s&p 500 was in fact, 12.14%.

    Thus, even if an investor put a lump sum into the market at the WORST possible time, his rate of return over the next thirty years was still far better than 8%.

    I have grown my own portfolio from a five figure base over the last thirteen years by more than 18% annualized and I started investing in equities in June of 1998 when the s&p 500 was trading at 1133!!!

    If this were a parable, buy to hold equity investing would look very much like the physical planting of a tree. It doesn't matter what location, or what day, or what month, or what year the tree was put into the ground. Thirty years later they would all look the same.

    The overwhelming simple fact of the matter is that the stock market works from the perspective of time IN, not "timing."

    Buy equities- HOLD equities. Everything else, is commentary.

    The problem dealing with people like you is that I have more than 200 YEARS of historical data sitting in front of me and all you have, to be quite frank, is your own ignorance.

    nuff said.

  • Report this Comment On June 03, 2011, at 12:04 PM, PeyDaFool wrote:

    daveandrae,

    You know what they say, "Ignorance is bliss, baby!"

    Would you happen to have some literature I could read which may open my eyes to your point of view?

    I consider myself an open-minded kind of guy. I'd certainly give it a glance over if you could recommend a book or two.

  • Report this Comment On June 04, 2011, at 8:11 PM, ofasho wrote:

    I want to reiterate what was said in the first post, as this article and its comments are truly eye opening.

  • Report this Comment On June 05, 2011, at 5:05 PM, Tsinky wrote:

    I would love to see some of the super-investors' checklists.

  • Report this Comment On June 05, 2011, at 7:55 PM, afamiii wrote:

    i) Keep on waiting for MSFT. Didn't you hear the Wintel monopoly has been broken by the smartphone/tablet. Value trap, MSFT will ultimately follow RIM and NOK to the bottom. Even if they all 3 should form a merger of losers.

    ii) A better list of traits would come from Mark Tiers excellent book. Winning Investment Habits of Buffet and Soros (also included are the habits of Icahn and Templeton.)

    1. They learned to manage risk; 2. They developed their own investment philosophy, strategy and system for choosing what to buy, what price to pay, when to buy, how to manage risk and when to sell for profit. 3. They developed emotional control (yes patience, discipline, decisiveness, etc.); 4. They developed the right attitude to learning (perpetual learners, take responsibility and learn form mistakes, etc.) 5. They do it for love, not money (the best pro's in any activity do it for love not money, investing is no different.)

    The five investors in Mark's book were not born with these traits, but they developed them either early in life or later during their career.

  • Report this Comment On June 05, 2011, at 10:59 PM, somethingnew wrote:

    This was a good one. Thanks for food for thought.

  • Report this Comment On June 06, 2011, at 12:15 AM, PeyDaFool wrote:

    Thanks for the heads up about Mark Tiers' book. I have it on order and am looking forward to review it.

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