I’m guessing that most individual investors would aspire to be as successful as investing icons like Phillip Fisher, Warren Buffet, or Peter Lynch. They are all great investors and have dramatically exceeded the average market performance. While their strategies might differ, there are still some common characteristics between them. An understanding of these commonalities and their subsequent application might then help you in becoming a better investor yourself. So, let’s get down to it. 1) They spend time doing research This first attribute applies not only to investing in the share market. It is applicable for all things…
I’m guessing that most individual investors would aspire to be as successful as investing icons like Phillip Fisher, Warren Buffet, or Peter Lynch. They are all great investors and have dramatically exceeded the average market performance. While their strategies might differ, there are still some common characteristics between them.
An understanding of these commonalities and their subsequent application might then help you in becoming a better investor yourself. So, let’s get down to it.
1) They spend time doing research
This first attribute applies not only to investing in the share market. It is applicable for all things in life as well.
I probably won’t be too far off base when I say that hard work is necessary if you really want to do well in something. Thus, when it comes to investing in shares, acting on a hot-tip might give you an upper hand for a while. But over the long run, it’s unlikely you will win the entire war.
At the end, before we even invest in any share, it is critical that we understand how companies function and what their prospects and risks are. Fortunately, you can find most of what you need to know about a company from its annual report. In a Fortune magazine interview, billionaire investor Jim Rogers once quipped:
“If you get interested in a company and read the annual report, you will have done more than 98% of the people on Wall Street.”
2) They do not over-diversify
You may have heard that diversification should be practised to prevent excessive loss in a portfolio in case of a mishap with just a single security. In Singapore, an easy way to diversify could be with the SPDR STI ETF (SGX: ES3). The exchange-traded fund mirrors Singapore’s market benchmark the Straits Times Index (SGX: ^STI), which is made up of 30 different shares. As a result, owners of the ETF actually wind up owning 30 shares too.
But just because diversification is likely to help pare down risk and losses doesn’t mean that there are no costs when it comes to it. Diversification can also dilute your overall returns if you overdo it. Let’s take telecommunications outfit StarHub Ltd. (SGX: CC3) as an example. The share has gained 111% since the start of 2009. But because it’s just a small part of the STI amongst 29 other companies, its impact on the market index is diminished; the STI has returned just 82% in the same time frame.
Fisher perhaps summed it up the best with his wise quote:
“I don’t want a lot of good investments; I want a few outstanding ones.”
3) They are long-term investors
Successful investors know that they should not trade excessively as there are many reasons why too much trading can backfire.
Buffett has even brought an aversion to trading to an extreme by once saying that “Our favourite holding period is forever.” But although he does buy and sell shares at times, he has mostly stuck to his guns as some of his greatest investments have been in his portfolio for decades.
Besides delivering outsized capital gains, a fundamentally strong company which is held for the long-run can also provide growing income each year through its dividends. Jardine Matheson Holdings Limited (SGX: J36) is a good example in this case, as it has rewarded its investors through consistent growth in its annual dividend over the last 12 consecutive years.
4) They keep their emotions under control
One key difference between novice and successful investors is that the latter group avoids a herd mentality like the plague. They are contrarian in their investment decisions and it might take years of experience to reach that kind of mentality.
But, a statement Buffett once made could possibly help you get there faster:
“The fact that a given asset has appreciated in the recent past is never a reason to buy it.”
The reverse is probably true as well – the fact that a given asset has depreciated in the recent past is never a reason to sell it. Keep those words in mind when you have the temptation to follow the crowd in piling onto a share or selling a share.
Being contrarian in your investment decision making for the right reasons can be a lucrative action. Back in March 20009, the Straits Times Index had gone below 1,500 points – today, it’s above the 3,300 level. Investors who had courage to go against the wind by ploughing their money into shares in March 2009 would have seen their wealth more than double in just 5 years.
In summary, great investors do in-depth studies; they don’t over-diversify; they invest for the long-term; and they keep their emotions at bay when investing.
And fortunately, these are habits and traits which you can instill within yourself, even if it’s happening slowly.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.