A bit volatile out there recently, isn’t it?
How do you feel?
Calm or nervous?
I choose to tell myself to stay calm and use the opportunity to refresh my memory on what I should do in order to be successful in long-term investing.
It all can be summarized in one secret: STAMINA and PATIENCE. Oh, are these two secrets?
Or I could be a bit more elaborate. 
So, here are the traits of the perfect stock investor (“Rational Optimism”):
(Biases mentioned in brackets are examples of biases that can be surmounted by each respective trait)
1) Able to sit quietly—alone—in a room and can endure inactivity (“Action Bias”).
2) Able to delay a few minutes in order to have a second marshmallow instead of having only one immediately (“Hyperbolic Discounting”).
3) Doesn’t act in the heat of the moment, reflects instead on core values and goals, and responds only when calm and when the rational brain is again in control (“Dunning Kruger Effect”).
4) Doesn’t overestimate his tolerance for risk and seeks high returns involving corresponding risk levels (“Regret Aversion”).
5) Always assesses a risk/reward ratio and ensures that it fits the “documented system” before committing to buy a stock (“Current Moment Bias”).
6) Is perpetually prepared for “Black Swan” events (“Normalcy Bias”).
7) Decides less, decides better (“Illusion of Control”).
8) Doesn’t flee situations that create the emotional reactions of fear and stress, since this would be the opposite of “buy low and sell high”. A simple refresher: If the goals for your investment capital will not allow you to keep your money fully invested for at least five years, you don’t need to invest in financial markets (“Myopic Loss Aversion”).
9) Is proficient in overcoming loss aversion and keeps losses small by always honouring predetermined protective stops. Is aware that no system delivers winner stocks all of the time and that losers are part of the game (“My Current Trade Must Be A Winner Bias”). Has swapped out the “conviction that I’m right” with “acceptance that I’m probably wrong”.
10) Is humble, operates from a mindset of not knowing, and “proud” to admit to mistakes and willing to change (“Overconfidence Bias”). Follows the rule of thumb: “The more confident I am in an idea, the more accurately I should be able to state and rebut the opposing view.” Keeps self-belief constantly in check and knows when to listen to others.
11) Is curious and open-minded: Reads widely, and not only about investing (“Information Bias”), rather more about the world and how it works (Abundance, Monetary Systems, Nature, and History), regardless of how these facts fit into his worldview.
12) Thinks deeply, trades rarely, and retains an emotional distance from her investments (“Weakness of Will”).
13) Is a master in self-control and patience: Knows that TIME is the retail investor’s edge over Wall Street and knows the difference between waiting and being patient (“You’ve got a minute?“).
14) Accepts randomness (“Gambler’s Fallacy“) and understands that what is happening might not keep happening (“Recency Bias”). The antidote to the Recency Bias is asset allocation, and not shifting the allocation based on what had happened in the past few months, but rather according to the investment criteria she had laid out beforehand, and through regular, disciplined re-balancing.
15) Is calm when things aren’t going as expected, and patient in the pursuit of her plans, rather than constantly chopping and changing (“Status Quo Bias”). Takes complete responsibility for her thoughts, feelings, and actions in the stock markets.
16) Is flexible and can adjust her mental models when they’re not working (“Blame Bias”). Clearing her mind is a powerful heuristic when faced with a nagging suspicion that any of her ideas may have come from a flawed source. Has learned how to adapt to changing facts.
17) Actively looks at dis-confirming evidence for her theories (“Confirmation Bias”).
18) Is prepared for volatility and fully aware that wanting to suppress volatility likely will suppress returns as well.
A good way to understand volatility is to visualize that investing is a long-term journey where an investor is walking up a mountain with a yo-yo. The yo-yo is bobbing up and down (= volatility), but the investor moves to higher ground as the journey continues (“Failing to understand Exponential Growth and Compound Interest”).
19) Consistently prefers to minimize losses—by avoiding costly mistakes—than to maximize gains by scoring big wins (“Loss Aversion”).
20) Always buys at a price she wouldn’t sell at, and sells at a price she would no longer buy at (“Anchoring Bias” and “Endowment Effect”).
21) Knows that the stock market is a zero-sum game in the short-term and only economic growth resulting in earnings growth will bring the stocks towards their long-term upwards trajectory (“Neglect of Base Rates”). But the markets can lead the economy or lag it for years.
22) Hardly watches CNBC or Bloomberg but if that happens, it’s taken as pure entertainment (“Authority Bias”), because she knows that experts know less than they think (“Seer Sucker Illusion”).
23) Is extremely comfortable with her decision to do nothing most of the time (“Intuition”), since “do nothing” are the two most powerful words in investing.
24) Knows the why behind her actions (“Purposeful”) and has a mission that goes beyond her individual identity.
25) Is a happy non-materialistic introvert who refrains from multi-tasking, eats a low-fat, low sugar diet, and adheres to good sleeping habits (Hmmm, those were at least six traits in one, but I didn’t want to exceed the list of 25 traits).
Isn’t it ironic that the stuff we should do still comprises of so many “do nothings”?
In life, it’s always the choice between doing more of the good things or doing less of the bad things. In successful stock investing, it’s more often doing less of the bad things.
Unsurprisingly, such a perfect investor is difficult to come by. Are you one of them?
And do let me know if I have missed out any trait that you consider essential for your success in the stock market.
“Traders rarely die rich, patient investors often do.” – Philip Carret
Andy,
In the trading world, we are always on guard against “over trading”.
Those traders you know are probably “trading junkies” 😉
The most patient traders I know are those who only buy when there’s a severe bear market, and sell when we have an aging bull market.
In between, they do nothing 😉
I’m not so patient.
I like to ride the long trending trades, but since they don’t appear every year, I don’t mind doing so small trades in between while I wait 🙂
Hi Jared, as long as a trader trades for the right reason(s) it’s all good. I have known some who appear to be doing it just for the dopamine kicks. That’s hardly sustainable.
Andy,
You know what?
After reading your 25 traits of a stock investor, I find ALL of them can apply to a trader too!
That’s until I reach Philip Carret’s quote…
Then I remember he’s an active fund manager; so its all good!!!
Wink.
Jared, yes true, they ALL could apply to traders too. But do traders even aspire to those traits? Like “enduring inactivity” or “deciding less” or “trading rarely” or “doing nothing”. The stock traders I know would not see those as desirable traits (you being the exception, of course).
Yes, Philip Carret was an active fund manager, but certainly not what we would define as a trader.
I am an active long-term investor too. To even be in the stock market one has to be active at least once in the life by buying something. That’s active to me. Ha ha ha