The 4 Qualities of Great Investors

It was a debacle of epic proportions. Hundreds of the brightest financial minds from the nation's capital stepped into their vehicles, fastened their seatbelts, started their engines ... and went nowhere.

Yes, we were in a daze (the CFA level II exam tends to have that effect), but that's no reason why an army of successful analysts, accountants, bankers, brokers, and traders would slowly inch their luxury cars and SUVs towards the exact same exit.

I shook my head, quickly located a side street, and cruised home.

A three-letter stamp doesn't make you a better investor
In both traffic jams and investing, common sense will often serve you better than book smarts. Most of the CFA candidates trapped in their vehicles that day could probably dissect a company's financial statements and calculate its weighted average cost of capital in a fraction of the time it took them to get out of the parking lot -- but I sure wouldn't want one of them managing my money.

And I'm not alone.

As Chuck Akre, manager of the FBR Small Cap (FBRVX) mutual fund, told a small gathering of Fools recently, "I run into all kinds of people in the investment business that are brilliant -- but they're not great investors." Chuck knows a thing or two about being a great investor -- he has been named one of Barron's top 100 mutual fund managers for four consecutive years.

So what makes a great investor?
Accounting aptitude, economic expertise, and stellar spreadsheet skills are all excellent attributes -- but they're hardly prerequisites for being a great investor. The world's greatest investors typically possess four common qualities:

1. The discipline to refrain from speculation.
2. The courage to buy what's currently out of favor.
3. The conviction to hold steady (or add to an existing position) when the share price drops.
4. The patience to wait for Mr. Market to come around.

Discipline, courage, conviction, patience. That's it. That's all.

Speaking of great investors ...
Warren Buffett is the epitome of a great investor, and, not coincidentally, he possesses the aforementioned four qualities in spades. At the tail end of the 20th century, the "Oracle of Omaha" was widely derided for his famous aversion to dot-com stocks. For a while, it appeared that the naysayers were correct: Buffett's investment vehicle Berkshire Hathaway (NYSE:BRK-B) trailed the S&P 500 by more than 20 percentage points in 1999, the first time Buffett had lost to the index in nearly two decades.

Despite mounting criticism, Buffett eschewed overvalued tech darlings such as Sun Microsystems (NASDAQ:SUNW) in favor of quality companies trading at a discount to intrinsic value, like Jordan's Furniture. Buffett also doubled down on existing holdings that he felt were undervalued, such as American Express (NYSE:AXP). Most importantly, Buffett stuck to his proven investing strategy even as many of his peers openly questioned his competence. Of course, we all know how the story played out: Since 1999, Berkshire has enjoyed 10.4% annualized returns, versus a paltry 2.4% for the S&P.  

What would Warren do?
Fortunately, you can still profit from Warren's wisdom, even if you lack access to time travel.

If analysts' growth expectations strike you as aggressive, you may want to think twice before committing your cash. Are you confident that Cognizant Technology Solutions (NASDAQ:CTSH) can grow its revenues at a 35.5% annual clip for the next five years? Does Electronic Arts (NASDAQ:ERTS) really warrant a triple-digit price-to-earnings ratio? When a company is on the tip of every televised pundit's tongue, it's a safe bet that the share price has already baked in some serious growth.

Buy where others fear to tread
If you want to master the first half of the "buy low, sell high" mantra, you'll have to learn to love downtrodden industries and underappreciated stocks. The average Wall Street analyst would rather set his loafers ablaze than buy shares in a homebuilder, as evidenced by the precipitous plummet suffered by the likes of Pulte Homes (NYSE:PHM) and D.R. Horton (NYSE:DHI).

Yet all homebuilding stocks are not created equal. Philip Durell and his colleagues at Motley Fool Inside Value have identified a stock in the industry they believe is currently trading at a discount to intrinsic value of nearly 40%. They've also found a building materials manufacturer with a wide moat and a history dating back to 1901 whose share price has been halved. The company's largest shareholder? Warren Buffett.

If you'd like to read the full investment thesis for these two companies, as well as our other active Inside Value selections, click here to take a free 30-day trial. There is no obligation to subscribe.