FIVE COMMON TRAITS OF SUCCESSFUL INVESTORS
Ignoring fluctuations and investing regularly a good start
Our company, 5i Research Inc. has now owned Canadian Money-Saver magazine for five years. The magazine provides independent views on all aspects of financial and investment planning. It’s tough running a magazine these days, but once in a while we get some nice compliments. The best news we get, ironically, is sometimes when a subscriber cancels their subscription. Let me explain: We get cancellations, of course, for various reasons, just like any other magazine would. We always ask the customer for a reason, just so we know and perhaps can make improvements. Every so often, though, the answer comes back as ‘I just don’t need any more financial advice — I’ve got enough money.’ We of course love this answer, even if it means losing a customer. But this column is not about us, it is about these successful investors. We have found some common traits among them.
Here are five:
SUCCESSFUL INVESTORS DO NOT AVERAGE DOWN ON LOSING POSITIONS
Recently, Bronte Capital put out a great investing piece on the perils of averaging down. While, like anything, once in a while, it can still work, generally it is a plan that fails. As the blog piece puts it: After all, if you loved something at $40 and you were wrong, you might love it more at $25 and you are almost as likely to be wrong, and like it more still at $12 and could still equally be wrong. Throwing new money at losing positions has killed many an investment career in the fund management world. Don’t let it kill your own portfolio.
SUCCESSFUL INVESTORS LOVE AND USE DRIPS
Dividend Re-Investment Plans, or DRIPs, are one of the wonders of the investment world. This is when you buy shares in a company and register the shares with the company’s DRIP program. Then, instead of getting cash dividends you get more shares. Sometimes, these shares come at a 2 to 4 per cent discount to market price. Regardless, there is no commission. So, over a period of years, your money continually compounds into the stock you own. With the discount, it is the closest thing to “free money” you can get in the stock market. The rich investors we know use DRIPs as much as they can. They understand the power of commission and management fee-free compounding.
SUCCESSFUL INVESTORS CONTINUE INVESTING ON A REGULAR BASIS
This is reflected in the DRIP strategy above, but the successful investors we know see investing as a lifelong plan. Many of course will put away 10 per cent of their pay cheque, every month, and invest in good times and bad. This ensures that they buy more investments when things are “down” and less when things are “up.” Regular investors find they really don’t care much about market volatility. They know that what happens in the market today really has little impact to their possibility of investment success over the next 15 or 20 years.
SUCCESSFUL INVESTORS DO NOT ‘ BET’ ON ANY ONE SECTOR
Everyone has seen those hedge funds that post “great” returns one year or the next. Last year, for example, a Toronto hedge fund (we will leave the name out) rose more than 120 per cent and attracted a lot of attention. But a close examination showed that the hedge fund fell, sometimes sharply, in each of the prior five years. The performance shows the manager is simply taking “bets.” In some years the manager’s bet will pay off handsomely, in others, well, not so much. Rich investors know, though, that if you are going to go down 50 per cent one year and then up 80 per cent the next, you are eventually going to run out of money. Smart investors diversify their portfolios and do not bet on, say, junior golds or marijuana stocks. They may not make headlines with giant one-year returns, but their 20-year track record is far more impressive.
SUCCESSFUL INVESTORS IGNORE SHORT- TERM FLUCTUATIONS IN THE MARKET
Everyday, we get questions from clients along the lines of ‘ Why is my stock down 2 per cent today?’ More often than not, we do not even know the answer. Sometimes, stocks will go down. It does not necessarily mean anything at all. Stocks will often act independently of any company fundamentals, sometimes for long periods of time. The richest investors know that stocks don’t go straight up. They know that, over the long term, the fundamentals will win out. They don’t let a 2 per cent, 3 per cent or even 10 per cent drop scare them out of selling a great company too early.
There are many other characteristics of great investors, of course, and we hope to list some more in a future column. In the meantime, ask yourself how many of these investment traits you are following. Maybe you can improve your portfolio’s long-term prospects by following what “great” investors do.