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 you 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.
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 . The
Newsletter has been in existence since May, 1999. Tom’s investment
articles have been chosen as featured articles on dozens of other
web sites. For more information on this and other investment
topics, see http://funds-newsletter.com .
