How to achieve success in the financial market: 10 qualities of a successful investor

YEREVAN, 10 June. /ARKA/.  Famous entrepreneurs who have earned a great fortune seem remote and unreal to some. Their stories live ‘on TV’, social networks and somewhere else. There are also those who are inspired by examples of success and with unshakeable self-confidence ‘rush’ to conquer the investment market. 

Are any of these positions correct? Maybe an investor should have some super qualities to achieve high results. Or does one have to be in unique circumstances? Having turned to real stories, research and expert opinions, let's make a portrait of a successful investor.  For this purpose, let us consider 10 qualities of a successful investor.

1. Discipline

It is important for an investor to maintain order in various aspects of behavior. Discipline should be manifested in following one's principles, in acquiring new knowledge about the financial market, and in building a strategy. This quality is only truly tested by difficult circumstances. It is easy to say that you are disciplined when events develop according to a familiar and understandable scenario. But in times of crisis, people tend to act emotionally, succumb to illusions and deviate from their plans. Jason Zweig, a financial journalist and columnist for The Wall Street Journal, identifies discipline as an essential trait of an investor. In his view, in order to bring order at the practice level, it is necessary to:

- make checklists of one's actions and lists of selected assets;

- determine the optimal price of securities for purchase;

-conduct market research-;

- do not react to information storms;

- set a threshold of indicators, when reaching which it is worth rebalancing the portfolio.

2. Ability to think in the long term

Investor psychology is based largely on human nature itself and is laid down by evolution. Fund manager and venture capitalist James O'Shaughnessy, citing the work of Henrik Kronqvist and Stefan Siegel, notes that even education has less influence on investment choices than genetics. It is inherent in humans to make decisions quickly, based on initial reactions.

Fear of losing money in a situation of volatility is a defense mechanism, and the ability to detach oneself from emotions and follow calculations is in a sense contrary to nature. For a successful investor, the present is important only in connection with the future. He must be forward thinking and patient.

 

3. Focus on the process, not just the results

It is common for most investors to focus on the recent performance of a fund, asset or strategy. When selecting companies and making a plan, it is indeed important to evaluate the companies' performance. However, for your own forecasting, you should also analyze your decision-making process. Based on past performance alone, many investors do not understand exactly what they are doing and why. They are only replicating a certain model, which may not be applicable in changed circumstances.

O'Shaughnessy cites as an example the results obtained from buying the 50 stocks with the best annual growth over five years. Such a strategy, the comparison shows, was more effective than investing in the S&P 500. However, the returns were achieved during a period when speculative stocks soared. The securities subsequently collapsed. By choosing them in a different period, the investor would have crashed. So, you can't focus on short-term performance without considering context and background.

Jason Zweig also writes that you shouldn't take anything for granted and copy strategies just because of past high performance.

 

4. Ability to ignore forecasts

Investors often act based on other people's estimates and forecasts. David Dreman, a well-known investor, compared the forecasts of market opinion leaders with actual results and found that between 1988 and 2006, analysts and economists of the S&P 500 had an average annual percentage error of 81% and 53%, respectively. So, even experts can't always predict developments. Your decisions should be based on actual observations and your own principles.

5. Persistence and patience

James O'Shaughnessy notes that outstanding investors use different strategies but are similar in their unwavering long-term commitment to principles. One of his examples is Ben Graham. The investor has always followed the same criteria for selecting an issuer: sales volume, liquidity, debt, earnings growth and its price-to-earnings ratio, and dividend payments. Over 13 years, Graham arrived at a total return of 377%, beating the market by 248%. The strategy was unprofitable in some periods, but then returned to high performance. That is, in order to make a profit, it was necessary to remain patient in the long term, not abandoning the chosen path in moments of drawdowns. 

 

6. A strong mental attitude

To invest successfully over the years, an investor must make decisions based on his or her own habits and vision rather than on emotions, external events, and other people's views. According to O'Shaughnessy, such ability is trainable. The expert notes that self-control of people who earn steadily on the financial market sometimes borders on stoicism.

A successful investor is able to accept personal responsibility and admit mistakes. Such a person does not blame others, analyses his own actions and results. An investor should take any experience, even negative, as a lesson, a source for conclusions. Emotions are often followed by distorted interpretation, which does not allow correcting mistakes.

Mental toughness is more of an acquired trait than an innate one. To develop it, O'Shaughnessy recommends tracking your reactions to events by keeping a diary. This will help to better characterize your own patterns of behavior and correct them. You need to believe that you are capable of controlling your own mind. Emotions and even negative manifestations - fear, greed, envy - are natural. It is important to notice them in yourself and leave them in the background when making decisions.

 

7. Focus on probabilities rather than possibilities

It is important to distinguish between ‘possibility’ and ‘probability’. Belief in your own success should be supported by an understanding of how you will arrive at high performance. It is possible to imagine both an incredible jump in the selected assets and a sharp drop. But unless these scenarios have an objective basis, the strategy is unlikely to be effective. All companies can fail or make a breakthrough, but the probability varies from case to case.

For forecasting, James O'Shaughnessy suggests evaluating results over a long time horizon, looking at how often and by how much they outperformed market fundamentals. Few investors make comparisons with the benchmark rate and are willing to analyze large amounts of data. However, it is the probability-based approach that provides a huge advantage.

 

8. Curiosity

Many success stories show that outstanding investors are not only talented financiers but also strong individuals. They are characterized by hard work and a desire to develop. Knowledge from various spheres, the habit of reading, finding and analyzing information help to act in the market.

Warren Buffett considered healthy lifestyle, self-education and various hobbies to be the signs of most rich people. He wrote: ‘If at the end of the day you come to the conclusion that you know exactly as much as you knew in the morning - then something you are doing is wrong’.

High wealth is achieved by people with developed emotional intelligence. They understand what can affect a person's behavior in certain circumstances. This helps them listen to themselves and others, anticipate, avoid or resolve conflicts. Emotional intelligence is important to ward off unfriendly and unscrupulous people, which means choosing reliable partners in the marketplace.

 

9. The right attitude to money

If a person sees wealth as something unacceptable, indicating mercantilism and dishonesty, he or she is obviously not seeking high returns. This attitude does not only manifest itself in the context of investing and can negatively affect results in any area. People who deny the importance of money often face financial difficulties, become envious or turn their lives into martyrdom.

The opposite attitude to earning money - obsessing about getting rich - is also very likely to lead to poverty or inner disharmony and feelings of dissatisfaction.   Earning a decent income is not an obligation or slavery. Do not be afraid of money or bow down to it. A successful investor will be a person who sees finance as a tool and understands why it is needed.  

10. Positive outlook on life

When discussing the causes of wealth and poverty, Warren Buffett noted that people who aim to reach new heights earn high incomes much more often than those who focus on savings. A person who is unable to visualize long-term prospects will not be a successful investor because he or she lacks the skills to plan properly.

The habit of complaining and seeing life as something beyond one's control turns into poverty. People with negative attitudes are often unproductive. They are afraid of change, which prevents them from finding optimal solutions. Success is achieved by those who seek not just new ways, but also ways to abandon old ways.

It remains to be concluded

The portrait of an effective investor shows that the necessary qualities can be developed by setting the right attitudes. Results in business depend on whether a person is ready to invest and change. A successful entrepreneur is not a superhero, but a strong personality. 

This article was prepared as part of the joint project "Year of Investing in Oneself" by ARKA, AMI Novosti-Armenia news agencies and Freedom Broker Armenia. 

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10:00 06/10/2024