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Home Smart Investing 3 Key Ingredients to Become A Successful Investor

3 Key Ingredients to Become A Successful Investor

Warren Buffett is widely accepted as one of the greatest investors of our time.

His track record of growing his wealth is legendary. His humble, folksy ways have also endeared him to the investing masses.

It’s no secret that Buffett is extremely smart and has a photographic memory, qualities that have helped him to become one of the richest men on the planet.

But he did not become a great investor overnight.

When he first started out investing at a young age, he probably had the same amount of wealth as the average investor.

But, over time, it was his temperament and habits that allowed him to compound and grow his wealth exponentially.

As such, these traits are the ingredients that you need to become successful in investing.

A word of warning, though.

Although these characteristics may sound easy, or even obvious, they do take time and practice to achieve.

With that in mind, these are three aspects you need to know to become a more successful investor.

Patience

Patience may seem like a trivial quality to highlight, but I believe it is an underrated trait among investors.

Companies need time to grow and expand.

Investors need to have the patience to wait for the growth thesis to play out, and this may take years or even decades.

For companies that have demonstrated the ability to continue growing for an extended period, the financial rewards for investors can be enormous.

Take Nike (NYSE: NKE) for example.

Just ten years ago, its share price hovered around US$18. As its revenue and profits grew, its share price has climbed more than five-fold to US$100 today.

If an investor had been impatient and sold his shares at any point, he would have missed out on the huge gains the stock clocked up in the last decade.

Impatience has also led many investors to churn their portfolios through excessive buying and selling.

This undesirable behaviour not only racks up huge amounts of commission fees but also balloons into a huge opportunity cost as they miss out on long-term compounding.

Emotional control

It has been said that the two horsemen of the stock market are greed and fear.

These two emotions represent the extremes of human psychology when dealing with money.

Benjamin Graham, the father of value investing, remarked that the stock market resembled a manic-depressive person called Mister Market, who alternately swung between optimism and pessimism.

Graham’s characterisation is an apt way to describe what happens as investors get caught up in a flurry of emotions that dictate their buy and sell decisions.

However, to become a successful investor, we need to keep our impulses in check.

Greed may lead you to chase rising share prices and abandon all caution to the wind, resulting in everyone playing the “greater fool” game.

Fear, on the other hand, may cause you to sell your shares in a panic when unexpected bad news hits, even though the underlying business may remain solid.

Both actions can be detrimental to your financial well-being.

Ability to learn from mistakes

The third trait is the ability to recognise your own mistakes and learn from them.

No investor has a perfect track record (yes, not even Buffett!).

But the thing that sets Buffett apart is his willingness to admit to his mistakes and then learn valuable lessons from them.

This simple but important trait makes him a better investor over time.

The good news is that you can mimic Buffett by keeping an investment journal to help you chronicle these mistakes and act as a reference guide for your next investment decision.

The problem with many investors is that their ego gets in the way of making good investment decisions.

Pride and hubris can blind many investors to the brutal truth of their mistakes, making them hold on to losers for far longer than they should.

Holding on to lousy investments ends up being a double tragedy.

Not only is your money languishing in lemons that continue to erode in value, but the money could also have been reinvested in great, promising companies instead.

As you gain experience from these mistakes, your investment process should also improve in tandem.

And with a more robust investment framework and process, you will also end up making better quality investment decisions.

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Disclaimer: Chin Hui Leong does not own shares in any of the companies mentioned.

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