What makes a good investor? The ultimate guide on the traits that define successful investors. 20 characteristics of a skillful investor.
When the stock market is frothy, everyone thinks they’re a good investor because it’s so easy to make money.
This happened during the dot com bubble, and it might be happening again now.
I mean, look at what has been happening with GameStop, cryptocurrency, and the hot IPO market.
Frankly, it’s usually a bad sign for the market when people that would otherwise not invest are interested in investing.
Personally, I feel more comfortable investing when the average person is extremely fearful of investing in stocks.
When kids that live at home in their parents’ basement get caught up in a frenzy and start telling seasoned investors they don’t know what they are doing, it’s usually a sign that the market is headed for a downturn.
On the other hand, when the majority of society is too scared to invest, that’s usually the best time to invest.
Any good investor knows this because they understand what makes a good investor.
In this post, I will look at 20 characteristics of a good investor.
Since there is a long list of qualities to go over, let’s jump right into number one.
What Makes A Good Investor?
1. They Have A Long Investment Time Frame (5 to 10 years)
Out of all the traits I’m about to mention, the main trait that makes a good investor is their investment time frame.
Simply put, a good investor plans to invest in and hold a stock for at least 5 years.
When I worked as a mutual fund advisor, I used to complete risk tolerance profiles for clients.
Based on their risk tolerance, I would recommend mutual funds or alternative investments to suit their investment time frame.
One of the main questions was “when will you need the money?”
If the client answered anything less than 5 years, the mutual fund company I worked for would not let them invest in mutual funds.
Instead, we would recommend a safer option such as a GIC.
Of course, if you are one of the Robinhood traders that lives in their parents’ basement, you probably think I’m an idiot right now.
The thing is—I know how this ends. You might be making a lot of money right now, but bull markets do not last forever.
If you are a day trader, you probably think what I’m saying is comical. Well, if day trading is such a successful strategy, why do so many day traders sell courses?
2. Ability To Stick To An Investment Strategy
You must be able to stick to an investment strategy in order to achieve consistent investment returns.
If you can’t stick to a specific strategy, you will likely lose money.
For example, if you are an index investor, you can’t get caught up in the GameStop mess. Leave those gains or losses for someone else and stick to what you are doing.
If you are a dividend income investor, you can’t get caught up with growth investors’ returns from year-to-year. They might be up one year, but the next year they might not perform as well. Meanwhile, your investment returns will keep consistently chugging along.
The reason that you have to stick to your investment strategy is because that’s what you know.
If you step out of your realm, you will probably get burned.
3. A Good Investor Manages Risk
Investing is all fun and games when you are investing with little money.
But the larger your portfolio gets, the more you have to responsibly manage risk.
It’s a lot easier to invest with $1,000 than it is with $100,000.
Investing switches from gaining the highest returns possible to preserving your hard-earned capital.
To preserve capital, a good investor will manage risk by owning a portfolio of assets.
They won’t just bet big on GameStop and cross their fingers, because they actually want to keep their money.
If a good investor wants to speculate on a stock like GameStop, they will only risk a small amount of money that they can afford to lose. Perhaps 1 to 10% maximum of their money. If you don’t have enough money to do that, you probably shouldn’t be investing at all.
4. Self-Aware
What makes a good investor?
Self-awareness does. It takes someone who is self-aware of their own strengths, biases, and abilities.
If you know you aren’t interested in researching stocks, just buy the S&P 500.
Alternatively, if you know you can’t handle market fluctuations, you should invest more conservatively.
5. Willing To Put In Necessary Time And Research
To put it bluntly, you will be a trash investor if you are not willing to put in the necessary time and research.
Sorry to burst your bubble, but investing in stocks is nothing like gambling at a casino.
There are underlying factors that affect a stock’s price and performance.
If you want to be a good investor, you must be willing to put in the necessary time and research.
You will need to learn how to monitor your investments and track your returns.
Furthermore, you will need to read quarterly and annual earning reports, and you will need to understand how to analyze a stock and its balance sheet.
6. Experience
There is no greater teacher than experience.
Even if you don’t have professional investment training, you can become an expert if you gain enough experience.
If you watch one single stock and read news about it every day for a year, you will understand that stock better than some experts. You will begin to get a feel for its volatility.
If you start to invest with your own money, even if you lose money at first, you will gain experience with investing.
They say time in the market beats timing the market.
It also helps you learn about the market.
7. Grasp Of Psychology
The stock market’s daily movements are mostly related to investors’ psychology.
Sure, earnings reports and economics are huge factors.
But most of the price movements are caused by fear or greed.
Personally, I believe my calm demeanour is one of my greatest strengths when it comes to investing.
Volatility simply doesn’t bother me because I focus on earnings and I invest for the long term.
If you understand psychology and you begin to get a sense of why people act the way they do, you will have a tremendous advantage over most investors.
You will begin to look at downturns as an opportunity to get shares out of weak hands.
And you will be able to take calculated bets on growing trends.
8. You Read And Study The Investment Greats
A lot of people look up to family members, their managers, or friends within their small circle.
That’s great and all.
But it actually might be making you stupid.
For starters, most people only tell you about their wins, not their losses. And the truth is that most people are liars.
To be a good investor, or to be great at anything really, you should study the greats of that industry.
With the internet readily available, you can watch YouTube videos, read quotes, and learn from the best investors in history. You can read their books too.
If you want to be a good investor, study Warren Buffett, Philip Fisher, Peter Lynch, Chamath Palipatiya, Cathy Woods, Charlie Munger, Ray Dalio, and Benjamin Graham.
Look up to the best to ever do it instead of trusting someone who might not know what they are doing.
9. You Track Your Performance
A good investor will track their performance.
I mean, if you don’t track your performance, how do you even know if you are beating the indices?
And if you are not beating the indices, you are putting in unnecessary effort to achieve lower returns.
Of course, you don’t have to beat the indices every year if you have a specific strategy.
But over the long term, ideally, your strategy should outperform.
Also, tracking your returns is how you learn to improve.
It will let you know if your portfolio needs any adjustments.
10. A Good Investor Can Admit When They Are Wrong
One of the ugliest traits a person can have is to not be able to admit when they are wrong.
In my opinion, it is an undeniable sign of stupidity.
Because most of the time when someone will not admit when they are wrong, or they won’t admit that they don’t know something, it means they don’t have the faintest clue what they are talking about.
If you are intelligent, you are open to changing your opinion about something if you learn something new.
If you can’t admit that you don’t know something, just know someone smart is out there watching you make a fool of yourself.
11. No Emotional Attachment To Investments
Admittedly, I am fond of a few of the positions in my portfolio.
For example, I love Apple products and it has made me a lot of money over the years, so I am slightly attached to it.
But even though I do have an emotional attachment, I would have no problem selling it if the business suddenly changed.
12. Conviction
As a part-time worker, I haven’t been able to put my money where my mouth is as much as I would like to.
Because I am focused on managing risk, my money is divided up in over 20 different stocks.
But as my portfolio and experience grows, I am beginning to act with more conviction with my investments.
For example, after I spent approximately one month researching and studying Bitcoin, I acted with conviction when I moved all my cash into Bitcoin.
In order to make significant money in the stock market, you have to act with conviction when you find an opportunity.
13. Patience
As mentioned earlier, a good investor intends to invest in a stock for at least 5 to 10 years.
They don’t expect to make money on a stock in a week or two. That’s ridiculous.
You don’t start a business and expect to be profitable in one month or less.
As such, it requires patience to be a good investor.
To be honest, everything good requires patience.
Everything easy is usually not that good.
14. Volatility Doesn’t Bother You
To a good investor, volatility is an opportunity.
To someone less knowledgeable, market swings are scary.
If you aren’t ready to see the value of your portfolio go down by 50%, you probably shouldn’t be in stocks.
Market corrections are bound to happen if you invest for long enough.
Hence why good investing comes down to proper risk management.
You have to manage your portfolio according to your investment time frame, investment goals, and risk tolerance.
15. You Understand Stocks Are Businesses
I’m not sure about you, but I invest in businesses, not tickers that go up and down on a chart.
Good investors know that there is a business behind every ticker.
They don’t just buy a stock because they think their price will go up or because of some tip they got at a party.
The reason that good investors put money in a stock is because the company is growing revenue and earnings per share. Furthermore, they invest because the company increases its dividend or they believe the overall business is trading at a discount.
Buying a stock is the same as buying a business.
Would you buy a small business that doesn’t generate enough revenue to cover its expenses? Probably not, unless it is a startup that is expected to grow rapidly in the near future.
Stocks are businesses, not tickers that go up and down on a chart.
16. You Know You Won’t Be Right Every Time
Even the best investors make investing mistakes.
There’s a quote by Peter Lynch about the business of investing:
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” – Peter Lynch
So, even one of the greatest investors of all time makes mistakes from time to time.
Personally, I’ve made many investment mistakes.
A good investor knows this and is ready to adjust accordingly if they do make an error.
Sometimes it’s better to cut your losses.
17. You Have Professional Experience Working In The Markets
Although it isn’t everything, professional experience certainly helps you become a better investor.
If you gain professional experience, you will get to see how other investors invest and you can learn from their mistakes.
In addition, you will learn how the market works from the other side. You will understand the reason why stocks exist and you will learn the proper investment terms.
In my case, I have professional experience working in the investment industry. I worked as a mutual fund advisor and I worked at a stock brokerage to gain experience. To obtain those positions, I had to pass the Canadian Securities Course (CSC) and the Conduct Practices Handbook (CPH).
I’ll admit that I learned more by investing myself and reading books.
However, gaining professional experience certainly helped.
18. You Know The Difference Between Investing And Speculating
Good investors realize there is a major difference between investing and speculating.
Speculating is basically gambling on a stock. It is hoping the price goes up. Essentially, speculating means you buy the stock thinking someone will be willing to buy it from you at a higher price in the future.
On the other hand, investors buy a stock based on its intrinsic value. Investors buy stocks because the stock will be worth more in the future because the business makes more money.
They buy a stock based on its earnings, fundamentals, and ultimately because of the business.
19. A Good Investor Understands How The Economy And Markets Work
A good investor does not try to time the market.
They focus on acquiring the best businesses first and foremost.
However, what makes a good investor a great investor is understanding how the economy and markets work.
If you understand the monetary system, how interest rates impact markets, inflation, and why stocks exist, you will have a better chance at picking the right investments.
20. You Invest In What You Know
A good investor invests in companies they understand.
If the investment in question is outside of their circe of competence, they are comfortable leaving those returns for others.
In my case, I invest in easy-to-understand businesses such as utility companies, or I buy stocks in industries I’ve worked in. Since I’ve worked for banks and telecommunications companies in my career, I invest in those stocks because they are easier to understand.
Furthermore, I will invest in companies of products and services I personally use. Apple is the perfect example. Apple was one of the first stocks I ever bought back in 2012 because I liked the iPhone.
Since a good investor understands the business and personally uses its products and services, they are not nearly as worried about negative news.
It is kind of similar to owning a house. If the housing market suddenly takes a downturn, you aren’t just going to sell your house because it’s a tangible asset that you live in. You understand your house.
In the same way, understanding a stock that you own will help you avoid making poor, impulsive trades.
What Makes A Good Investor – Final Thoughts
So, what makes a good investor?
Is it natural ability or superior math skills?
Absolutely not.
You don’t need to be overly smart or skillful at math to be good at investing.
Frankly, almost anyone can become a great investor if they are determined to learn about it.
Although some natural characteristics help, such as patience, most of the other skills can be learned with effort.
As such, if you want to become a a better investor, focus on improving on the 20 characteristics in this post.
Related Posts
Investing With Little Money – 6 Easy Steps To Invest In Stocks When You’re Starting From Nothing
S&P 500: How To Buy It And Turn $10,000 Into $420,000
How To Monitor Your Investments: 9 Foolproof Ways To Stay On Top Of Your Portfolio
I am not a licensed investment or tax adviser. All opinions are my own. This post may contain advertisements by Monumetric. This post may also contain internal links, affiliate links to BizBudding, Amazon, Bluehost, and Questrade, links to trusted external sites, and links to RTC social media accounts.
Connect with RTC
Twitter: @Reversethecrush
Pinterest: @reversethecrushblog
Instagram: @reversethecrush_
Facebook: @reversethecrushblog
Email: graham@reversethecrush.com
Dividend Income February 2021 – Up 7% YoY
