6 Attributes of Successful Investors
Hello folks! Thanks for stopping by The Green Swan. Today I wanted to spend some time reflecting back on my investing past and give what I consider are the 6 attributes of successful investors.
First, let me start by giving an overview of my background. I’ve been in the finance field for 10 years. While I started in a role at a community bank, my career has taken me through an evolution of roles working with small businesses, middle market clients, and now large corporate companies. This has given me vast experience in seeing deals and transactions of varying sizes and differing viewpoints and considerations.
My role has lent itself (pun intended) to having an inside look at over a hundred completed or attempted/considered acquisitions and transactions. Many of these deals required deep dives into the respective companies and business operations including due diligence sessions with top executives.
Additionally, in recent years, my siblings and I have looked into numerous acquisition opportunities for us to invest in personally. If you’ve been following the blog for a while, you’ll know that we recently closed on an acquisition a few months ago.
While I am not disillusioned that many will see a 10 year career as woefully short of being able to provide thoughtful advice, and others will view 10 years as still in the beginning phase of a meaningful career, I do think my experience is somewhat unique and has allowed me to draw important conclusions.
The 6 attributes of successful investors that I’ve outlined below have been crafted with the purpose of helping those considering investing in individual companies and/or looking to buy or start their own small business like my siblings and I.
Know Your Numbers
One of the more valuable lessons I learned just starting out is how important it is to be able to know and understand financial statements. It may sound simple, but I’m not just saying you need to be able to comprehend some common figures such as EBITDA and ratios such as leverage and the trends thereof; it goes much deeper than that. The best and brightest folks I’ve been around have been able to pick up financial statements and understand almost immediately the financial condition of the company, some of the main issues and how it will do in the future. And the basis is being able to understand how cash flows through the business and how that is represented in the financials.
Understanding the numbers and the ability for the company to generate cash flow is the premise for determining present value.
Assessing strategy is difficult and multi-faceted. It starts by being able understand the company and what it does to make money, the industry in which the company operates and the competitive advantages the company has over the competition.
This can be applied to companies large and small. As an example, I’ll apply this attribute to the Payday Loan industry with which I recently discussed some of the issues it is facing. If you were in the market to buy a payday loan company (and few are these days), whether a national operator or local, you’d want to understand the products offered (payday loans, installment loans, title loans, etc), how those are being impacted by local and federal regulations, a vision of what the industry will look like in the future, and how you’ll fit into that future picture with respect to competitors.
This may be most easily described as finding your sweet spot and making the most of it. I’d compare this to the story of six MIT students who used card counting to make millions in Vegas, popularized by the book Bringing Down the House by Ben Mezrich. These students were able to calculate the odds at the table (their edge) and bet appropriately. Translating this to business, successful investors are able to find an edge and “bet” or “invest” appropriately to drive sustainable long term success.
Another great book I’d recommend is by Ed Thorpe titled Beat the Dealer where he explained his means to gain edge and his betting philosophy.
Distinguish between Common Sentiment and Fundamentals
This is key and a primary factor in being able to make money. Fundamentals are used to estimate the future financial performance of a company. Value supported by fundamentals can be seen by sales growth, improving operating margins, etc. On the other hand, sentiment and expectations of a company are implied by the enterprise value as determined by the share price for a publicly traded company or list price for a small business available for sale. Investors make money by having a viewpoint that is divergent from common sentiment and what current price suggests.
Reassess Your Beliefs
Successful investors are able to effectively reassess their previous viewpoints, determining what has changed or was assessed incorrectly, and adjusting their go forward plan. My career experiences have benefited from actively seeking out information or views that are contrary to popular belief to help me fully assess an opportunity.
Per Philip E. Tetlock and Dan Gardner’s book Superforecasting: The Art and Science of Prediction, beliefs are hypotheses to be tested, not treasures to be protected.
Avoid Heuristics and Biases
Recent decades have produced significant research into behavioral biases. One of the primary influencers in this field has been Daniel Kahneman and I’d strongly recommend his book Thinking, Fast and Slow.
Heuristics (rules of thumb) have associated biases which can result in misjudgment. There is a long list of heuristics and biases and successful investors can not only acknowledge and identify their presence, but navigate around them.
Do you invest in individual company stock or have your own small business? Let me know what you think of the 6 attributes of successful investors. Have I missed any?
Thanks for taking a look!
The Green Swan
Work Harder, Work Smarter, Retire Earlier and Find Your Beach
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