4 Attributes Of Successful Investors

Michael Mauboussin, the Director of Research for BlueMountain Capital Management and the former Head of Global Financial Strategies at Credit Suisse, is well known for writing detailed memos and articles on topics dear to my heart, such as investment processes, company-analysis techniques, and portfolio positioning.

In a piece written in August 2016, Mauboussin reflected on the top 10 attributes possessed by great investors. What’s encouraging about Mauboussin’s 10 traits are that they can be learnt and developed over time. In a previous article, I outlined the first two attributes of a successful investor.  In this article, I will explore the next two traits.

3. Assess The Company’s Strategy (How A Business Makes Money)

As investors, the most basic question that should be asked is: how does a company make its money?

The question looks simple but the answer may not always be as apparent as it seems. Some companies have complex, opaque business models involving many parties and arcane financial instruments. The investor should be able to clearly articulate how a company is able to sell its goods and services in order to generate profits and cash flows.

If this question (how does a company make its money?) cannot be answered easily, it may be better to stay away or observe the company for a longer period of time before committing capital to it.

The other aspect of assessing strategy is to look for the competitive moat within the business. What makes the products or services different? How does the business stand out from its competition such that it can earn a higher return on invested capital? Does it have some form of reputation or track record which can make customers “sticky”? Being able to tease out this information and having an understanding of the company’s moat can help the investor to make a wiser investment decision.

4. Compare Effectively

The most important thing an investor should compare is the gap between expectations and fundamentals.

I had previously written about this comparison in a previous article. In short, fundamentals relate to the company’s current financial performance while expectations on the company’s future is often captured in its stock price.

When these two aspects diverge, the investor has to be careful and cognizant. If expectations are lower than implied by the fundamentals, the stock could be cheap and neglected. In such a scenario, the investor has a good chance of buying with a margin of safety. If the reverse is true, then the investor should be wary as too much optimism may have been baked into the share price such that any disappointment in the fundamentals may cause a sharp and permanent decline.

I shall look at the next two attributes in the third of this series of articles. [Editor’s note: The third, fourth, and fifth article in the series have been published. They can be found herehere, and here.]

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