Long-term stock investing is one of the most efficient ways to create wealth and achieve financial independence.
Like most people, I’ve spent years trying to figure out how to become a good investor.
After reading dozens and dozens of books about different successful investors, I found out that there are certain character traits they all had in common.
Let’s see what are the most important qualities of a successful investor.
Patience
At the core of the investor mindset is patience. Accumulating big money through long-term compounding returns takes time.
Have you ever really thought about why, in spite of all short-term volatility, the stock market rises in the long term?
Well, it’s because the economy and the companies that operate in it tend to grow over time. Not overnight, but over time. Therefore, a successful long-term investor has to be patient with the companies he owns.
It’s also important to be patient with the stock market as a whole. Most of the time, the stock market is either undervalued or overvalued. It rarely stays in the neutral zone for long.
Therefore, when stocks are overvalued, an investor must be patient and wait for suitable buying opportunities. On the other hand, when stocks are undervalued, it can take a long time for the stock prices to reflect the companies’ intrinsic values.
Discipline
If there’s one thing to learn from behavioral economics and psychology, it’s that people aren’t rational and disciplined. It’s actually quite the opposite. We tend to be remarkably irrational and undisciplined.
When it comes to investing, good investors are those who remain rational toward market trends and disciplined in following their investment strategy.
Unfortunately, it’s remarkably difficult to stay rational when everyone else around you is acting irrationally during a market turmoil.
As investors, we tend to shift between the extremes. Sometimes we feel like we’re missing out if we don’t buy wildly overpriced stocks, and other times we feel we’re losing everything if we don’t sell our undervalued stocks at bargain prices.
If you’re able to consistently invest rationally during market highs and lows, there are significant gains to be made.
One of the best ways to maintain rational is to distance yourself from the hustle and bustle of the market and focus on your investment strategy.
Taking distance ensures you don’t get caught up on all the hype (or panic) that’s spreading through the market, and helps you stay objective about your investments and disciplined toward your investment strategy.
Also, one method I adopted from a famed fund manager Guy Spier is to never buy or sell stocks when the stock market is open. This approach has proven to be hugely beneficial and has prevented me from making a lot of rushed decisions. Most of the time, I’ve ended up doing nothing, and have been better for it.
Humility
Let’s get one thing straight: Long-term stock investing is not easy.
Whatever anyone is telling you, investing successfully and consistently for decades can be a tough thing to accomplish. Especially for active investors.
Even investing passively in index funds requires a lot of discipline as well as taking care of your personal finances.
A successful long-term investor remains humble and respects the market. I have witnessed time and again when investors (including myself) tend to get overconfident during long bull markets.
Of course, it’s easy to be a stock market genius when everything is going up. Unfortunately, what goes up, must eventually come down.
When it comes to the stock market, it’s worth remembering that it’s not the things we know we don’t know that get us. It’s the things we don’t know we don’t know that are the most devastating.
So, even (and especially) when it seems that nothing can go wrong, it’s important to stay humble and not become overconfident.
If you don’t have humility toward the stock market, markets will eventually humble you.
Self-Awareness
One of the fundamental things in becoming a successful long-term investor is to be aware of your own strengths and weaknesses.
There’s not a single investor in the world who’s without flaws. We all have our own biases that affect our investment decisions, whether we like it or not.
Therefore, the most important thing is not to be flawless, but to acknowledge your biases and act accordingly.
For example, I’ve found that the best way to combat overconfidence is to focus on opposing views when making an investment decision, so I must second-guess my own reasoning.
Not only should we be aware of our biases, but we also need to be realistic about how much risk we can actually take. It’s essential that your investment strategy matches your risk tolerance, and that you’re keenly aware of all the risks involved.
Unfortunately, people tend to idolize steel-nerved risk-takers who make tremendous profits with daring trades. Of course, you rarely read about the vast majority of speculators for whom the risk didn’t pan out.
There’s no shame in playing it safe and being risk averse. In fact, you’ll most likely do better when you focus on not losing money instead of chasing the big winners.
It’s also worth remembering that if taking excessive risk would automatically lead to higher returns, there would be no risk to begin with.
Emotional Control
The stock market is a curious place.
It’s probably the only market in the world where people are willing to buy more the more expensive it becomes.
When stocks have been soaring for a long time, it starts to become harder and harder to resist the temptation of buying more. Of course, the more you pay for something, the less returns you can expect from it.
Therefore, it defies all logic that the lower the expected returns become, the more we’re willing to pay.
It takes a tremendous amount of emotional control to resist the fear of missing out and the temptation of buying overpriced stocks.
It’s also worth remembering that when a company is valued high, it must get everything right for the stock price to hold. Then again, when a company is undervalued, it only needs to get one or two things right for the stock price to rise.
Intellectual Curiosity
I believe that one of the key things in successful investing is continuous learning. Successful investors are, without exception, always learning more. Investing is one of those activities where it really does pay to know more.
When you understand how the stock market works, what to expect from certain types of stocks or asset classes, or how the human mind operates, it increases your chances of success immensely.
The beautiful aspect of knowledge is that it tends to accumulate. Over time, we start to find connections between things that we might’ve never even thought about before.
For me, the best way to learn new things is by reading. It’s the cheapest and most efficient way to increase your knowledge.
Not only it is useful to constantly learn something new, but I’ve found it highly profitable to also regularly review the very basics. It keeps your feet on the ground.
Optimism (With a Dose of Realism)
The way I see it, the stock market is fuelled by optimism. If everyone believed that no company would ever succeed again, the stock market would cease to exist. Therefore, it’s essential to have faith in the future.
There’s a saying that pessimists sound smart while optimists make money. In my opinion, a successful long-term investor is a mix of both – a realist.
Being unwarrantedly and overly optimistic is a recipe for disaster, but so is being needlessly pessimistic.
Personally, I see no reason to believe that things wouldn’t go well in the long term, but I also find no reasonable argument why things couldn’t get bad in the short term.
Because of this, it’s important to invest in a sustainable way that ensures you stay invested for a long time without being forced out of the market.
This usually means keeping your leverage to a minimum, having sufficient diversification, and avoiding the riskiest investments.
