The investment business can claim a bunch of smart people. Whether you're talking about analysts from Wharton, "quants" from MIT, or value gurus from Columbia, the investment industry has become uber-competitive. So how's one to get an edge in the stock market? Well, having a superior understanding of psychology can give even the smallest investor a leg up.
It's all in the approach
Why was Warren Buffett able to capture value in Wells Fargo
The great investors approach investment ideas in a superior way over the rest of us. For example, I was totally blown away when I read that Buffett calculated that Inside Value selection Coca-Cola
What was amazing about the analysis was that it was a very novel approach. However, it struck at the very crux of the matter -- and in a single statistic, it provided the fulcrum for billion-dollar investment theses.
Outside the style box
What the great investors do often goes beyond slapping multiples on estimated earnings or free cash flows, or building detailed spreadsheets. In fact, it seems that many great investors don't build valuation models at all.
So what is it? I think one of the key things the greats do is to draw from knowledge in several different fields. For example, I've read many times that Bill Miller and his team of analysts at Legg Mason
A clear mind
To avoid the hustle and bustle of downtown Manhattan, Buffett chose to live and work in his hometown of Omaha, Neb., and doing so seems to improve his focus. In fact, Buffett often says he spends his days reading newspapers, talking on the phone, and just thinking a lot. I read in a Forbes article once that Mohnish Pabrai generally tries to avoid having a busy schedule -- and he actually takes a nap every afternoon.
Avoiding the daily vagaries of a busy schedule and a stressful environment can do wonders for an investor's ability to think and analyze. Perhaps that's one of the biggest competitive edges, even though it doesn't get a lot of notice.
A winner's attitude
Don't laugh -- I honestly believe that a winning attitude can contribute to investment success. I think a positive attitude manifests in much more rigorous analysis and causes winning investors to seek out management that they think reflects that positive attitude.
Psychology plays a huge role in how we analyze companies, how we go about our investment processes, and how we handle our portfolios in the context of the broader stock market. By contemplating how to think about investing, and continually probing and exploring different angles, investors can mentally improve their future investment returns.