I know many investors. So do you. In fact, chances are many of the people you know, family, friend or colleague, is an investor of sorts.
It led me to wonder, despite there being so many investors around, how many of them have really found success in the markets? How many are really True Investors?
Here are six traits that separates a successful investor from the rest.
1. You track your returns properly
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If there is one thing that separates a genuine investor from an amateur, it is this. The serious investor tracks his returns.
I share the example of a friend who bought an old apartment for close to a million a few years back. He spent a good sum of money renovating the place and after two years managed to resell the unit for 1.2 million. He was satisfied with his profits and he was proud to share his success.
But a simple back of the envelope calculation revealed that the numbers are not really what they seem. His $200k ‘profit’ was chipped away by renovation costs of $70k, agent fees of 18k, additional sellers stamp duties $48k (4%) and stamp duties of $25k when he first purchased the unit. This is not taking into account lawyer fees, the interest he has to fork out to service his loan for the three years he has owned the property and other miscellaneous expenses.
Had an objective calculation been carried out, he would probably have realised that the profits are hardly as healthy as they seem.
My friend was lucky though, he was still in the black after all these incidentals. Others may not be so fortunate. Despite the sale price being higher than their initial purchase price, many property sellers are in fact wallowing in negative territory.
Mental tracking is easy. We all keep a running count of our hits and misses in our heads. Human beings are very good with that. Unfortunately human memory is also extremely susceptible to distortion.
Recalling our winners is pleasurable. If we could, we would want to relive them all the time. The losers on the other hand, are too painful and we cannot wait to erase them from history. We negate them as much as we can. In doing this, our real returns get distorted.
The serious investor keeps a spreadsheet of every investment he has made. If the investment is in stocks, the buy and sell prices are religiously tracked. Dividend payouts gets recorded. For bonds, coupon payouts are tabulated. For properties, all the associated costs must be included.
There is an old management adage – What gets measured gets improved. For retail investors, this rings true too.
2. You care about overall returns
Tracking returns is not the entire story. Tracking is but a tool. Tracking provides the data. The data tells us the overall performance. It tells us how well we are doing.
The true investor is not fixated with individual winners and losers. He understands that investment is a process that is within his control. He also understands that the outcome is random and beyond his control. In other words, there are bound to be hits and misses.
The true investor takes all hits and misses in his stride. Because he understands that it is not the individual score that counts. A stock can drop by half but as long as the overall portfolio is outperforming the market, that is good enough.
It is the aggregate, over the entire portfolio, over the entire time frame, that truly matters.
3. You have the patience of a saint
There is a word for investors who do not have a long term horizon – they are called traders.
Do not get me wrong. There is nothing wrong with being a trader. A trader takes positions that are shorter term in nature. A trader is not afraid to say that he is wrong and reverses his trade. More often than not, traders rely on technical data – charts, indicators, volume to help him make a decision on market direction.
Trading is more fast paced and a trader lives more dangerously. While some trades can run into weeks or months, more trades are closed within minutes, hours or days.
If the market is a kitchen and profits are the spoils from a good cookout, then trading is microwave fast while investing is the slow cooking process.
It takes a long time for an undervalued company to realise its potential. Some companies remain undervalued for years on end. Some companies never ever realise their true value. Identifying and picking the right undervalued stocks are not difficult – it is having the fortitude to stick with it for years on end that is tough.
Investing is a true test of patience (although some would say parenting and I will also not disagree). That is what separates the genuine investors from the errr, traders.
4. You know the risks as well as the returns
My wife made a trip to the bank recently. Our fixed deposits have expired and she needs to do some housekeeping for our finances.
Not surprisingly, she got accosted by the friendly sales staff at the bank. The young and pretty lady with the huge diamond ring (her exact words, damn I should have made the trip with her) started pitching to her higher yielding financial instruments than the plain vanilla FD we were intending to park our emergency fund in.
Being the wife of this no-nonsense financial blogger helps. She explained that we had our finances mapped out and we are implementing the moves in accordance to our plan. She further explained that we are properly diversified and that we have as a component of the Singapore Permanent Portfolio, the Singapore Government Securities.
Young-and-Pretty-with-the-Huge-Diamond-Ring then went on to make a remark about government bonds yielding low, and that corporate bonds will make a much better choice.
Her remark could stem out of sheer ignorance or out of eagerness to push her product. Either way, it has not done herself or her bank any favours.
Higher returns arises from assuming higher risks. Corporate bonds yield higher simply because they are at a higher risk of default. It is easy to get seduced by the returns (24% per annum investing in gold bars anyone?) and overlook the risk.
True investors understand not only returns, they also know risk. They know the risk of every single investment they get themselves involved in. True investors watch their risk like a hawk.
5. You know the value, not just the price
Turn on the tv and you get endless ticker tape numbers screaming out at you. Flip open the classifieds, or check out any housing sites and you see countless properties for sale and you know exactly how much they are selling for. You hear about gold breaking five year lows and USD growing stronger by the day.
These are prices. Prices are everywhere. Everyone knows prices.
It takes no additional effort. It takes no in-depth analysis. It takes no further review. Prices require no further understanding. Prices are prices.
And price by itself has no value (pun intended). Investment is the act of buying something for lesser than its true value. There are many ways to value a company, a property or even a commodity. Some might be more robust than others, others can be a little more flaky. Some methods will determine today’s value, while other methods tries to look at the value in the future. For today’s discussion, the modality does not matter.
The only way for a true investor to be functional is to understand the value of his investment. Value serves as a benchmark for him to ground his investment on.
Remember – price is what you pay, value is what you get. The true investor knows what he wants to get. The true investor knows value.
6. You have a strategy
Armies do not go to war in a haphazard manner. Soccer teams do not play ball randomly. Companies do not enter new markets or launch new products without proper planning.
They strategise before hand. They know exactly what they want to achieve and how they want to achieve it. Like these organisations, the true investor does as well.
True investors have a strategy. In quiet markets, he is preparing and he knows exactly the moment he will strike. In chaotic times, he is unmoved because he has faith in his strategy and it keeps him grounded. When the market booms, the strategy will tell him when to sell.
On the other hand, an investor without a strategy will become listless when the markets are quiet. During turbulent markets he will become panicky. And he will be overcome by greed during good times. The investor without a strategy will dabble in different investments. He will drift with the tide.
The next time you make an investment, any investment at all. Ask yourselves these questions. Will you be tracking your returns? Are you monitoring your returns from a big picture point of view? Do you have the patience to see your investments through? Do you know the risk of the investment? Do you know the value of the investment? And finally, is the investment in line with your overall strategy?
The more boxes you are able to check off, the closer you are to being a successful investor.