To be a successful investor, there are two things you need to be good at.
First, you need to be quite comfortable being arrogant. Second, you need to be able to see the future.
Unique for investing
Arrogance isn't a desirable quality in most people, but it is a requirement for investors because we need to be sure we have made the right decision.
We need to be confident we are correct and have done all of the research required to go against the market. After all, when you are buying a security, you are buying it off someone who is selling. In other words, you are effectively saying you know better than the person on the other side of the trade.
If the stock is falling rapidly, you are saying you are better than everyone else who is selling at that moment in time, an incredibly arrogant point of view, but one that is required.
To put it another way, to be a successful investor, you have to see something the rest of the market is unable to. As the founder of Bridgewater, Ray Dalio (Trades, Portfolio), once described:
"All of the consensus is already baked into the price. In order to be correct in the markets, in order to make money in the markets, you have to see something that the consensus doesn't see. So you have to have an independent point of view."
This is something Seth Klarman (Trades, Portfolio) has also spoken about in the past:
"In investing, whenever you act, you are effectively saying, I know more than the market. I am going to buy when everybody else is selling. I am going to sell when everybody else is buying. That is arrogant, and we always need to temper it with the humility of knowing we could be wrong—that things can change—and acknowledging that we have a lot of smart competitors."
As Klarman mentioned, it is not enough to be arrogant; investors need to temper the arrogance with humility as well. If new evidence presents itself, investors should be happy to change their opinion on a company based on the new information.
This brings me onto my second point; investors need to be able to see the future.
Telling the future
In investing, past performance is never a guide to future performance. In fact, assuming a company will continue to perform as it has in the past indefinitely, can be a disastrous strategy.
Past performance does offer some guidance as to how a company and its management will act in different environments, but it is never a concrete template. This is why investors need to be able to understand what the future holds for any company or sector before they invest.
Granted, you will never be able to say with 100% certainty what the future holds for a company. If you try and think about what the world will look like in the next couple of years, you can construct a loose framework, as Stanley Druckenmiller (Trades, Portfolio) recommends:
"The number one principle would be do not look at the world today, what’s happened in the past and happening currently, is in the price. Try and think how the world may look differently in 18-24 months from now and try and base your investments on that and not what’s true today. It’s amazing what that single little exercise can do."
There is no exact template on how to be a good investor. Indeed, there is no definitive strategy for investment success. There are, however, several qualities that link all investors. Understanding what these qualities are and how they impact your investing is part of the puzzle.
Arrogance is required to be a successful investor, but it must also be tempered with humility. You must attempt to predict the future, but never take this prediction as gospel, only guidance.
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