Our clients, friends, and family members often come to us for financial advice. With 100 years of combined experience and a range of professional designations, our team knows what it takes to achieve success – and is familiar with the many challenges that investors face along the way.
I started the Great Investors series to share the insights our team has developed over the years to help anyone make confident decisions when it comes to their wealth.
Below are the top 10 most-important traits of a Great Investor. Click to read each article for additional details.
1. Great Investors Love Dividends
Great investors love dividends, which represent a share of a company’s profit, primarily because they tend to grow along with the profitability of the underlying companies that pay them. Although there is, of course, no guarantee that equity dividends will grow over time; historically, dividends have provided an excellent tool for maintaining a growing income stream.
2. Great Investors Don’t Take Chips off the Table
American pop culture has taught us to believe that stocks are like poker chips, subject to the whims of chance and easily “lost” if you are dealt a bad hand. In fact, stocks represent the partial ownership of the earnings, profits, and assets of real businesses.
If you go to a casino, you should know in advance that the odds are stacked against you. In the long run, the house always wins and you always lose. The stock market doesn’t work that way. If you invest in the stock market, the odds are stacked in your favor. In the long run, at least historically, the stock market always goes up (eventually).
3. Great Investors Ignore Possibilities
An intelligent investor should focus on what’s probable, not what’s possible, when making investment decisions. Although it is possible that a number of current threats could derail stock prices, it is more probable that a period of volatility is only temporary and will long be forgotten, as stock prices continue to advance. It seems most probable that a patient investor, with a reasonable time horizon, will likely enjoy a return similar to the eight to ten percent provided by equities in the past.
4. Great Investors Celebrate an Anniversary
Great investors should “celebrate” an important anniversary – the 2008 financial market crash and subsequent recession. At the time, it seemed an absolute certainty that the world as we knew it was coming to an end, and that the economic and financial fabric that makes our American quality of life so incredible was being torn to shreds. Then something happened that almost nobody expected: things started getting better, and the economy and markets started to recover.
The generational lesson this anniversary teaches us is that the world actually does not end, it just acts like it is ending about every decade or so. No matter how much we are tempted to believe that “This time is different”, and that this crisis is the one that will be the final nail in our coffin, it is not.
5. Great Investors Understand Emotions
The American household has never been wealthier, and it is less indebted than any time in the last 30 years. We are experiencing a time of unprecedented wealth and prosperity in this country, although you wouldn’t know it by turning on CNBC or opening the Wall Street Journal. A Great Investor has a mature emotional temperament during both the peaks of euphoria, as well as the depths of terror, with a healthy understanding that a well-designed written investment and financial plan will get them through both.
6. Great Investors Know a Bear When They See One
The official definition of “bear market” is a period of time during which equity prices decline by 20 percent or more. Typically, equity bear markets are accompanied with a high level of existential terror and doomsday thinking among investors. However, since World War II, despite temporary setbacks in equity prices, the S&P 500 has slowly but constantly marched forward from under 20, to over 2,600 today.
Historically speaking, the declines in equity prices have been only temporary, while the advances in values and dividends have been permanent.
7. Great Investors Know the “Real Risks”
Investors who define “risk” as the temporary volatility in stock prices may be seriously miscalculating the real risks they face in their wealth planning. There are two major “elephants in the room” that Americans are systematically and consistently ignoring when they think about their wealth planning: the definition of money and their longevity.
8. Great Investors Don’t Rubber Stamp
Most asset allocation “rubber stamp formulas” are based on an attempt to produce “risk-adjusted returns” for clients. Many advisors are seeking to dampen volatility (thereby eroding return), so that investors won’t panic and sell their equities during volatile times.
However, Great Investors don’t seek to “dampen volatility” by limiting equity exposure so that they can sleep better at night. Instead, they accept that volatility and return are forever linked, and they work to develop the temperament and emotional resilience to sleep at night, despite any volatility.
9. Great Investors Understand Diversification
An intelligent investor, one who understands true portfolio diversification, will not only accept the fact that diversification means that they must own asset classes or sectors that are underperforming, they will also embrace that fact. Author Nick Murray eloquently describes our philosophical beliefs about equity diversification in just 6 easy points.
10. Great Investors Are Grownups
Being a grownup is a prerequisite to being a successful equity investor. This means accepting that there are no facts about the future. Investors who do not develop a grown up and mature acceptance of volatility, and who buy into the “myth” of investment return without risk, are the most likely to be caught unprepared when volatility strikes.