As any seasoned investor will tell you, if you want to be successful in the stock market, you'll have to devote a considerable amount of time and effort to understanding stocks, businesses and trends.
Unfortunately, there is no shortcut for research. It may be tedious and time-consuming, but it is required if you want to be successful over the long term.
Research is just part of the investment process, however, and I am gradually starting to believe that to be successful, there is one skill you need to learn that is more important than all of the others put together.
It takes time
Something I have learned by studying the world's best investors over the years is that each one has their own way of investing.
Seth Klarman (Trades, Portfolio), for example, likes to invest in deep-value stocks and assets wherever he can find them, both in the public and private markets. Warren Buffett (Trades, Portfolio) uses a similar approach, but he's not as strict about valuation as he once was. Carl Icahn (Trades, Portfolio) does not seem to care about valuation as long as he can create value in one way or another. Howard Marks (Trades, Portfolio) likes distressed debt. Joel Greenblatt (Trades, Portfolio) likes quality and value, as defined by his now famous Magic Formula. The list goes on.
All of these investors use different strategies, but they have still achieved investment success -- when I say investment success, I mean they have produced market-beating performances and accrued enormous fortunes for themselves in the process. If you go on the monetary value alone, Buffett is the most successful. Regardless, they have all achieved returns most investors can only dream of.
All of these investors use different methods to make money, but they have one main trait in common: they are willing to wait for the perfect opportunity, no matter how long it may take.
One common trait
I think this is an incredibly underappreciated part of the investing process. Waiting might not be exciting or glamorous, but history shows us that waiting for the perfect opportunity and buying stocks at discount valuations is essential for long-term success. Both value and growth investors have to be patient and wait for the right opportunity. Growth investors wait for a company to reach an inflection point before diving in, while value investors wait for a company's valuation to arrive an attractive level.
Patience is such a critical part of the investment process, I could go so far as to say that without it, you are doomed to fail as an investor.
The big problem is so many market participants are influenced by the bright flashing lights of investing and the fear of missing out, which pushes them to take risks and invest before they are ready or before Mr. Market offers them the right opportunity.
With this being the case, I have decided to try and build an investment process that forces me to wait. I have drawn from the advice I often see passed around on spending on big-ticket items. Before you buy something, you should think about it for a week. If you still want it after that week, then you should go ahead and buy it.
I now use a similar process with stocks. If I see an investment I like, I make a note to look into it on the next weekend. If I don't have time, then I will have to push back the research process. I am entirely OK with this. If I can't find enough time to research an opportunity thoroughly, then I shouldn't be investing. It has taken me a few years to realize this, but now I'm more than happy to let an opportunity pass if I don't have the time to look into it. Nine times out of 10, if an opportunity is so attractive, I will find the time to look into it. Thus, the whole process acts as a sort of a value filter.
Granted, this process isn't perfect and I am sure it can be refined. Still, I think it is a small step on my investment journey to becoming an investor who thinks more and trades less.
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