A lot of people want to become successful investors, but what kind of qualities are actually required to do well in this game? What kind of psychological makeup is needed? How clever do you have to be? In his book, "One Up on Wall Street," investor Peter Lynch explains what the secret ingredients to building a winning investor are.
Be independent, but retain your humility
Lynch puts a big premium on the ability to think critically and to not be swayed by the opinions of others. But just as important is the ability to change your mind when you are wrong:
“It seems to me the list of qualities ought to include patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit to mistakes, and the ability to ignore general panic.”
Some people accept the consensus without questioning it, while others can think for themselves but are too proud to admit their own mistakes. It is difficult to have opinions that go against the grain and believe in them and, on the other hand, to revise or jettison those opinions when new facts become available.
Don’t be too clever
Warren Buffett (Trades, Portfolio) has said many times that to be a good investor one only needs a slightly above-average intelligence. Lynch also believes this and, moreover, thinks people can be too smart for their own good:
“In terms of IQ, probably the best investors fall somewhere above the bottom ten percent but also below the top three percent. The true geniuses, it seems to me, get too enamored of theoretical cogitations and are forever betrayed by the actual behavior of stocks, which is more simple-minded than they can imagine. It’s also important to be able to make decisions without complete or perfect information. Things are almost never clear on Wall Street, or when they are, then it’s too late to profit from them. The scientific mind that needs to know all the data will be thwarted here.”
In other words, don’t get caught up in thoughts and reasoning. At the end of the day, a stock is either going to go up or it is going to go down. There is no point trying to think about every single factor that might go into that move. Boil down what the most important things are about the stock in question and focus on those. Having a lot of mental processing power is of great value in the field of physics or chemistry, where almost everything is deterministic, but is of significantly less help in a field with so much inherent randomness as finance.
Control your emotions
Finally, try to avoid making decisions based on emotion and hunches:
“It's crucial to be able to resist your human nature and your 'gut feelings.' It’s the rare investor who doesn’t secretly harbor the conviction that he or she has a knack for divining stock prices or gold prices or interest rates, in spite of the fact that most of us have been proven wrong again and again. It’s uncanny how often people feel most strongly that stocks are going to go up or the economy is going to improve just when the opposite occurs. This is borne out by the popular investment-advisory newsletter services, which themselves tend to turn bullish and bearish at inopportune moments.”
"Gut feelings" don’t occur for no reason. They are manifestations of various subliminal messages and unconscious thoughts you may have developed about a particular stock, industry or economy. So the next time you have an amazing hunch, just remind yourself that you have not thought critically about it and are more likely than not sleepwalking into disaster. After performing due diligence, ask yourself again whether you still feel as good about the idea.
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