How can you be a good investor? The answer to this question, in my opinion, depends on your temperament.
I say this because I believe temperament determines an investor's style, and if you try and force a style on your temperament, you will only lose money.
Can an investor change their strategy?
Take the example of Warren Buffett (Trades, Portfolio), who is widely considered to be the world's best investor. Buffett is a slow and methodical investor. He hates conflict and will try as hard as possible to remove himself from situations where hard choices have to be made. He likes to jump over small hurdles and is happy to wait for decades for these little jumps to add up.
On the other hand, you have Ray Dalio (Trades, Portfolio) and Jim Simons (Trades, Portfolio), both of whom have made vast fortunes using strategies that rely on quick decisions, and hundreds if not thousands of trades every single day.
Then there are investors like Carl Icahn (Trades, Portfolio) and Bill Ackman (Trades, Portfolio), who have built a reputation for themselves as activist investors. Conflict is their business, and they need to make quick, bold decisions to get ahead of the competition.
My point is that all of these strategies are solid approaches, but the investor is just as important as the strategy.
Could Buffett be an activist? He has been in the past, but on those occasions where he has had to take control (Salomon Brothers, Dempster Mill and Berkshire Hathaway's (BRK.A, Financial)(BRK.B, Financial) textile business), he's hated it. Could Icahn be a value investor? He was at the beginning, but it was too slow and he wanted more action.
Could Charlie Munger (Trades, Portfolio) have become a quant trader? He might have the intelligence, but because the man only owns a handful of investments personally, evidence suggests he'd most likely avoid the business altogether.
The fact is it takes time to establish an investment style that you are comfortable with, because no one is born a value investor.
This mentality develops over many years of studying the strategy. Similarly, no one is born as an activist investor. That takes lots of knowledge and an understanding of how Wall Street works.
Finding the investment style you are comfortable with requires just as much time and attention as trying to find an investment strategy that achieves the best results.
Value investing might seem like the most attractive style to follow at first, but no one tells you how difficult it is to continually find new undervalued stocks and research every opportunity on a granular basis.
This is why Buffett recommends all new investors start by owning index funds. Owning an index fund might not seem like the most exciting way to invest in the stock market, but until you know and understand what type of investments you prefer, then you are your own worst enemy.
It is much better to start small and ease into an investment strategy than make the jump without any experience beforehand.
The bottom line
In conclusion, the fastest way to become a good investor is not to find an investment strategy that gives you all the answers, but to understand what type of investor you are.
When you have the answer to this question, you can then focus on building a strategy that conforms to your own temperament and work around that.
You might be surprised about the investment style you eventually settle on because value investing is not for everyone, and neither is growth investing.
Nevertheless, as long as you are comfortable with using the strategy, then the chances of success are much higher.
Disclosure: The author owns Berkshire Hathaway.
Read more here:
- What We Can Learn From Buffett's See's Candies Deal
- A Look at Berkshire Hathaway's Insurance Business
- Warren Buffett, Harley-Davidson and Buying What You Know
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