Myths of being a good stock investor
We often talk about Warren Buffet, Rakesh Jhunjhunwala, Charlie Munger and many others. They have created massive wealth by investing in the stock market. Each one of these great investors has a different style.
However, there are a few common characteristics of these investors:
“I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up, and boy does that help, particularly when you have a long run ahead of you.” – Charlie Munger.
“Read 500 pages…every day. That’s how knowledge works. It builds up like compound interest. All of you can do it, but I guarantee not many of you will do it.” – Warren Buffet.
Investing is a multi-disciplinary field and requires you to read across various disciplines, including science, history, biographies, human psychology, etc.
“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” - Warren Buffet.
A lot of investors get caught up in the euphoria or pessimism of the stock market. The mistake that investors commit is buying when others are buying and sell when others are selling. The rationale of buying or selling is often not thought through, and hence the returns are usually less than the market.
You need to control your emotions and also develop the patience to delay the short-term gratifications.
Let’s also look at few areas that are not linked to investing but often, a lot of people associate these characteristics with being a good investor.
CFA, MBA etc., have no guarantee that someone will excel in investing. You must know the concept of the time value of money, and that’s about it. Interestingly we were taught the idea of compounding in middle school.
Although accounting is not a necessity, it will help you do better in investing. Accounting can be self-taught too.
We all know that insurance agents and bankers do not add any value. Instead, they eat away your returns in the form of commissions, upfront fees etc. Interestingly, even if someone is a qualified advisor or a fund manager, they may still not add any value to stock picking. Surprise, surprise!!
After many years of working with a variety of investors and a whole lot of reading, I have come to the conclusion that you invest for only one reason, “become financially free” as soon as possible.