Ryan Irvine writes:
Warren Buffett (Trades, Portfolio) once said: "Above an average IQ, there is no correlation between investment performance and intelligence."
When the world's greatest investor speaks his mind about what it takes to succeed in the world of stocks, anyone with half a head on their shoulders would be wise to listen (presuming they own or plan to own stocks). In this particular quote, Buffett goes on to identify fear and greed as the pitfalls that get most investors in trouble.
It is true that the stock market can inspire the worst in many of us. Our long history of catastrophic market bubbles is a clear example of how greed can persuade people to toss all reason and common sense aside in the face of what appears to be easy profits.
Before someone can really start to answer the question of what makes a good investor they first have to know what a good investor is. A good investor is someone who has enough knowledge to understand the basic principles of what they are doing, who is able to generate a reasonable return over time, and who can at the very least identify making a bad investment. Remember that a bad investment need not necessarily lose you money. You can in fact make money from a bad investment if you took risks that you did not understand. For example, it is possible for you to take all of your family's life savings, mortgage your house, go to Las Vegas, gamble it all on one card hand, and make millions of dollars. The fact that you made money only means that you were lucky but no one would consider you a good investor.
You may not consider Las Vegas to be the best choice for my analogy on bad investments but the fact is that what most people do in the stock market is closer to gambling than it is to real investing. Gambling essentially comes down to chance and the odds are stacked against you. It is the same in the stock market when someone buys a stock on pure speculation. The likelihood of profit is based only on chance and the odds are stacked against you. The problem that most people face is that they don't know how to remove chance (or risk) from the investing equation and they don't have 10 years of their lives to invest into becoming experts on the subject.
Fortunately, it does not take years to learn a couple key principles that will take a massive amount of the chance (or risk) out of investing. The simplest of these principles is also the perhaps the most important: Buy real companies that generate profit and free cash flow and don't pay too much for them.
This may seem obvious to a few, erroneous to some, and probably just plain boring to most. But this is a basic and simple principle that is applied religiously by nearly all of the world's great stock investors and it can be implemented in anyone's portfolio with the help of a good adviser.
Keep it at the forefront of your mind the next time you decide on a stock purchase.