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6 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 previous articles, I outlined the first four attributes of a successful investor.  In this article, I will explore the next two traits.

5. Think Probabilistically

Investing is an activity where we must always think in terms of probabilities, as there is nothing which is certain. This is because we are dealing with events in the future, where there are myriad possibilities. So as investors, we need to be able to assign probabilities to scenarios.

The idea here is that outcomes may not always reflect the quality of the original decision, and I have written about focusing on having the right process, rather than relying on the outcome alone to determine the correctness of the original course of action. This ties in with the need to think in terms of probabilities. It’s worth noting too that in investing, the frequency of being correct does not matter – what matters is how much you gain when you are correct, versus how much you lose when you are wrong.

There are several ways to come up with probabilities. One method is known as subjective probabilities, and is a figure which ties in with a state of knowledge or a belief system. The problem here is that as markets and businesses change and evolve, these subjective probabilities also need to be constantly updated, and the risk is that we as investors attach a wrong probability because we did not consider pertinent new information. A more useful method may be the frequency approach, which considers the outcomes of a reference class. The frequency approach is useful for measures such as profit and sales growth rates where the investor needs to anticipate them with respect to similar companies.

6. Update Your Views Effectively

This ties in with the confirmation bias, which is when investors actively seek out information which conforms to their beliefs and reject information which goes against their views. Mauboussin states that “beliefs are hypotheses to be tested, not treasures to be protected.” He’s essentially advising us to continually question and challenge our own beliefs so that we do not get sucked into a particular line of thought where we think we cannot be wrong.

Successful investors need to do two things: To actively seek out information or opinions which are different from their own, and to also incorporate differing views into their investment thesis when the evidence is irrefutable. Neither is easy to do, but we should work towards this state of mind as it would greatly improve our investment performance over time.

I shall look at the next two attributes in the fourth of this series of articles. Stay tuned!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.