Do you have what it takes to become a world-class investor?
A study looked at the best-performing funds from 1997-2006 to find the qualities of the best investors in the world. What they found was surprising: The best funds had a lot in common. Micheal Mauboussin published the four traits of the "superinvestors" in his book, More Than You Know.
So what makes great investors great? Here are the four qualities, in no particular order:
1. They buy and hold
In a world where the average stock is held for mere seconds, its comforting to see that slow and steady can still win a race. The best performing investors had a turnover rate of 35% per year, roughly equal to a three-year holding period for each individual stock. In contrast, the average fund held stocks for just over one year.
Buy-and-hold styles create ancillary advantages like lower commissions and lower taxes, which only help compound on the outperformance of long-term oriented investment managers.
2. They go big or go home
Diversification helps, but too much diversification can lead to "diworsification," which reduces returns by diluting top investments with lower-quality stocks. No surprise, those who outperformed had confidence in their best ideas, placing more than one-third of their capital in their biggest ideas. The average fund placed only one-fifth of its assets in its ten biggest positions.
3. A bottom-up approach
There are two general investment frameworks for most investors on Wall Street. The first is a top-down approach, which starts with big picture economic ideas and follows with picks to fit an economic thesis. The other is a bottom-up approach, in which investors largely ignore the state of the economy and instead spend more researching and identifying unique characteristics of individual companies.
From 1997 to 2006, the United States experienced dot com and housing booms and busts, which should have given advantage to the economic forecasters. But it was the patient, bottoms-up investors who beat the market during the period.
It's September 15, 2008, and Lehman Brothers just filed for Chapter 11 bankruptcy protection. You start thinking of your colleagues who will soon be hunting for a job. Your LinkedIn inbox explodes. Everyone in New York is wondering which bank is next. It seems like the world is coming to an end.
This would be a problem, you know, if you lived in Manhattan.
Believe it or not, most great fund managers don't live in a financial center. Most hail from places far removed from Wall Street -- places like Baltimore, Memphis, and Omaha. Though it seems surprising at first, isolation from finance "hubs" helps keep investors grounded. Suffice it to say that the "superinvestor's" distance from Wall Street allows them to keep their cool when others cannot.
The Foolish bottom line
Investing veterans will find few surprises in the four traits above, but this should serve as a reminder that a Foolish, long-term horizon combined with a focus on analyzing companies, not whole economies, can provide a basis for generating superior, long-term investment results.
The media may glamorize high-speed trading, and Manhattan skyscrapers, but the people who are beating the market are doing it with an old-fashioned, methodical approach to stock picking.