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People often don't realize that an investor's
own characteristics help determine how well they
do. This article will show you what some of these
characteristics are.
I have written many times about something that
most investors largely ignore: The role of the
investor's own characteristics in determining
how well he/she does as an investor. Perhaps this
statement seems a little abstract and therefore
it is easy to disregard it especially coming from
someone such as myself whom most readers probably
have yet to hear of. But when you realize that
similar statements have come from three of the
world's most successful stock investors, Peter
Lynch, Warren Buffet, and John Templeton, perhaps
people may want to pay a bit more attention.
Peter Lynch, in his book "One Up on Wall
Street", discusses the characteristics of
successful investors. As most investors are aware,
Lynch served for 13 years as manager of America's
top ranked mutual fund at the time, Fidelity Magellan.
An investment of $10,000 in the fund in 1977 would
have grown massively to $280,000 by 1990. In this
book, Lynch states: "Ultimately it is not
the stock market nor even the companies themselves
that determine an investor's fate. It is the investor."
And: "It is personal preparation, as much
as knowledge and research, that distinguishes
the successful stock picker from the chronic loser."
Lynch further states: "The key to making
money in stocks is not getting scared out of them
...;" he continues: "in dieting, as
in stocks, it is the gut and not the head that
determines the results."
Lynch advises us to try to examine our own behavior
and attitudes before we enter into stock investing.
Answer these questions: Are you investing for
the short-term or the long-term ? How will you
respond to a sudden and unexpected severe drop
in prices of your stocks? (We should all know
much better where we each stand on this now that
it has been happening, although not so suddenly,
for a long time.) Without thinking about this
beforehand, you may lack the necessary conviction
to avoid becoming another "market victim",
someone who abandons hope and the ability to reason
things out at the worst of moments, selling out
at a loss.
The above statements, although written by Lynch
for those who invest in individual stocks, are
nevertheless just as valid for mutual funds investors.
What additional qualities did Lynch suggest make
for a good investor? Lynch lists the following:
patience, self-reliance, common sense, a tolerance
for pain, open-mindedness, detachment, persistence,
humility, flexibility, a willingness to do independent
research, a willingness to admit mistakes, the
ability to ignore general panic, and the ability
to make decisions without complete or perfect
information.
Some final words from Lynch are perhaps relevant:
"... it's crucial to be able to resist your
human nature and your 'gut feelings.' It's the
rare investor who doesn't secretly harbor the
conviction that he or she has a knack for divining
stock prices or gold prices or interest rates,
in spite of the fact that most of us have been
proven wrong again and again. It's uncanny how
often people feel most strongly that stocks are
going to go up or the economy is going to improve
just when the opposite occurs. This is borne out
by the popular investment-advisory newsletter
services, which themselves tend to turn bullish
and bearish at inopportune moments."
Warren Buffett, perhaps the world's most hallowed
investor, learned that the successful investor
is often the individual who has achieved a certain
temperament. His teacher, Benjamin Graham, taught
him that the investor's worst enemy was not the
stock market, but oneself. Thus, despite superior
skills in mathematics, finance, or business acumen,
if you can't first master your own emotions, you
are not well-suited to best profit from your investments.
John Templeton, a masterful international investor,
believed that adopting a flexible, open-minded
point of view to fit different times, countries,
and investment climates, was the investor's greatest
need. He stated that the best value will be found
in stocks that are completely neglected and that
other investors may not even be aware of.
As applied to fund investing, this means that
you should not always expect that the kinds of
funds most others are investing in will always
be the best places to be. Thus, not only have
bond funds far outpaced stock funds in the last
few years, but categories of bond funds that most
people may not even be aware of (such as inflation
protected and international bond funds) have outperformed
even the staple for most bond investors, funds
that invest in corporate bonds or U.S. Treasury
issues.
Templeton admits he makes constant mistakes, but
because he is heavily diversified, the damage
is limited. He advises not to trust rules and
formulas. The world of investing is always changing
leaving the investor who sticks to time-honored
truisms sadly way behind. Everything has its season,
as the classic Byrds song "Turn! Turn! Turn!"
reminds us. Since the world is constantly changing,
the successful investor too must change when required.
For more information on whether you have the characteristics
needed to be successful as an investor, see my
web site.
About the Author
Tom Madell Ph.D. publishes Mutual Fund Trends
& Research Newsletter, a popular, currently
free source of mutual fund advice at his website
at http://funds-newsletter.com.
Tom's investment articles have been chosen as
featured articles on dozens of other web sites.
Recently, he authored a "Speaker's Corner"
article on a Barclays Global Investors site. (Barclays
the largest institutional money manager and index
fund manager in the world.) Tom has written and
published two books and numerous journal articles.
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