Yesterday, I wrote an article for GuruFocus about how, contrary to public opinion, Warren Buffett (Trades, Portfolio) doesn’t buy and hold all of Berkshire's stocks "forever," even if he never buys with the intention of selling. His recent sale of his stajes in the four major U.S. airlines are proof that he is more than happy to cut his losses and move on to the next thing if he thinks this is the best course of action.
This is the kind of mindset that some people associate more with trading than with investing. While I certainly think that long term oriented investors in general should not over-trade, I do think that there succesful investors and successful traders share a lot of traits. Here are some other characteristics of good traders that I believe value investors can learn from.
Don’t set hard targets
A lot of traders have minimum profit targets. This is particularly true of proprietary traders who are funded by a firm, but can also apply to individual traders. Falling short of a target is often perceived as a sign of failure, and so some traders will make increasingly risky bets in an attempt to reach the target.
Of course, sooner or later this will lead to losses that cause the trader to miss the target by an even larger margin. Good traders understand this, and only take the opportunities that the market offers them.
In a similar vein, investors often go out of their way to achieve a specific rate of return every year. This is particularly true of someone who is thinking in terms of their retirement savings - they have an idea of how much money they want to retire with, and what age they want to do so at, so they chase the returns necessary to make that happen. But an investment is not going to yield a higher return just because you want it to. So many people end up taking on more risk than they would otherwise be comfortable with in an attempt to hit the magic number.
Don’t rely on the past as a guide for the future
The best traders know that correlations can be highly misleading. Just because something has worked in the past doesn’t mean that it will continue to work in the future. For instance, stocks and bonds sometimes move in different directions, but sometimes they move together. They are always on the lookout for warning signs that a historical correlation might be breaking down.
Similarly, good investors don’t allow themselves to be sucked in by historical patterns. Just because a stock has reached a historical low doesn’t mean that it can’t go any lower. Always focus on the fundamentals and on what is happening in the here and now.
Disclosure: The author owns no stocks mentioned.
Read more here:
- Warren Buffett Sold Airlines in April
- Seth Klarman: Value Investing Works Because Markets Are Wrong
- Howard Marks: Will Computers Wipe Out Market Cycles?
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