Four qualities that define a successful investor

Here are four qualities needed to become a successful investor. Thankfully we can develop these qualities in time. We neither need to be smart nor intelligent to succeed in money management.

1. Individuality:  We need to be clear about why we are investing. Otherwise, the smallest perturbation – a market up move or down move, or an opinion by an expert with tweet diarrhoea can make us question our choices.

This is possible only we understand what we need without worrying about what others are doing. This is the first step in personal money management. Sadly many of us buy first and think later.

2. Discipline: Once we create an investment plan suited for us, we need to stick to it, rain or shine. Due to the ups and downs of life, we may not invest regularly. We must keep track of the missed investments and make up for them later. Also, see: How do I become a disciplined investor?

Discipline is the fuel with which all financial plans move forward. Even less optimal investment choices can be made to look good with discipline.

3. Balance/composure: We must recognise that any choice we make in life or personal finance will have an associated cost. Sometimes the cost is immediately apparent, and sometimes it may take decades to reveal itself.

We must take the time to find out the cost or implications of our actions. For example, a home loan almost always means a lower retirement corpus. Wanting guaranteed returns almost always means an inability to fight inflation.

We can choose ‘expensive’ provided we appreciate what they imply and own up to them. We need a sense of balance to weigh the pros and cons of a choice without bias.

A sense of balance is also required to gauge if a risk is reasonable or not. All investment choices come with risk without exceptions. It could be a bond purchased from the government, an employee stock option, NPS or EPF, or a mutual fund.

Do we appreciate at least the major risks involved? How reasonable is taking on such a risk? For example, the risk associated with an equity fund is unreasonable for the short term and reasonable (that is manageable) over the long term.

We do not know what our future portfolio return would be, but we can ascertain “where we are” in our journey provided we have the composure to remind ourselves that we are investing in a way that is suitable for us.

4. Humility: The most important quality, in our opinion, is humility. We must recognise that there are a zillion ways to go from point A to point B, and ours is just one of them. It is rather immature to assume that what we are doing or our choices are the best.

If there is one thing that I have learnt over all these years of investing and researching finance, it is this: nothing stays on top forever; nothing will work all the time.

The market is an intractable beast that gives us joy and misery as it pleases. No one can claim to have conquered it or understood it. Equanimity to treat gain and loss on the same footing and the humility to recognise the role of luck and circumstances is most important.

We need to stop feeling superior about our investment choices. A passive investor claiming his choices are the best is just as misguided as an active investor who claims the same. We don’t know what will work in future. We make a choice and manage the consequences.

Humility also helps us conquer regret if we remember that things don’t always go to plan in the market. If our choices don’t work out, we must have the balance to get rid of them and move on quickly.

As far as our thinking takes us, a combination of composure, discipline and humility can make us successful, provided the milestones are based on personal requirements. Patience is a crucial quality, too, but blind patience is dangerous. The above qualities help us be patient with a purpose.

It is unlikely that everyone is born with all these qualities. Thankfully we can learn if we allow life to teach us.