Six attributes that will help you be a tip-top Buffett-like trader
Forget gambling on the market and embrace the sacred secrets of trailblazers and titans
The Cambridge dictionary defines “the right stuff” as the qualities needed to do or to be something, especially something most people would find difficult.
In his biography of Warren Buffett, Roger Lowenstein maintains that Buffett’s genius “was largely a genius of character — of patience, discipline and rationality”. That his success came from “an independence of mind and his ability to focus on his work and shut out the world”.
Could this be the right stuff — the personal qualities needed — to outperform the market?
Patience. There’s no shortage of market commentators who have maintained the need for patience as a prerequisite for success. As far back as 1688 Joseph de la Vega, the Jewish merchant, speculator, philanthropist and poet, wrote: “He who wishes to become rich from this game must have both money and patience.”
Bob Maynard believes there are three ways to make money in the markets. Option number one is physically exhausting: you work harder than everyone else. Option two is mentally exhausting: you’re smarter than everyone else. Option three is emotionally exhausting: you need patience with a long-term strategy and mindset.
“Most professional investors assume that they fall into option two while many also try their hand at option one to make up for any shortfall in smarts,” says Maynard. “My feeling is that there are always going to be people who are smarter than you in the markets and working harder doesn’t necessarily lead to better outcomes. Therefore, the third option offers the best chance for the majority of investors to succeed.”
Discipline. “There is no mental discipline more severe and exacting than that of speculation,” claims Henry Clews in his book,
of the Fine Line between Gambling and Investing. “There is no pursuit in which a man can less afford to indulge in whims, or prejudices, or pet theories, than that of stacking his money against the prospective changes in financial values.”
Unfortunately, as Franklin Williams wrote in his book If You Must Speculate Learn the
Rules: “Too many speculators ‘playing the market’ still persist in breaking the rules, gambling on the million-to-one chance that they will be the lucky ones to make quick fortunes without working for them.”
“Discipline is simply doing what you know you need to do,” says Charlie Munger, vice-chair of Berkshire Hathaway. “We all wrestle with discipline for it does not come easily, not even to the most successful.”
Rationality. Rationality and facts are vital to the investment process. Unfortunately, while we like to think of ourselves as the rational species, research in cognitive psychology and behavioural economics shows that our thinking and behaviour are often completely illogical. Intuitively, we tend to believe we can succeed using reason and careful analysis. Unfortunately, the evidence suggests that doing so is far harder than we like to think.
“We simply aren’t very good at looking at the available evidence for a given viewpoint with any degree of objectivity,” says Bob Seawright.
“While information is cheap and getting cheaper, meaning is increasingly expensive. We are beset by confirmation bias, our tendency to look for and accept evidence that supports what we already think we know and ignore the rest. We tend to reject new evidence when it contradicts our established beliefs.”
Independence of mind. It’s comfortable to be with the herd. Acting independently does not feel natural to us, but it may be the only way to succeed in the market. “The vast majority of persons have a natural tendency to shrink from the responsibility of standing and acting alone,” wrote Francis Galton two centuries ago.
Buffet says if you do not know enough about a situation to make your own decisions, you should get out of decisionmaking. “The fact that other people agree or disagree with you makes you neither right nor wrong. You will be right if your facts and reasoning are correct.”
John Templeton’s initial success was the result of an extreme strategy — hitting points of maximum pessimism with borrowed money. As was George Soros’s decision to take on the Bank of England.
Then there are those previously successful individuals who fared badly when they broke their isolation: Jesse Livermore’s escapades with the “cotton king” Percy Thomas; Nicolas Darvas’s losses after he moved into his brokers’ offices in New York.
Focus on work. As the saying goes, even a child understands that the way to outperform in most pursuits is to work harder and be more rigorous.
“Most in money management work hard,” says Mark Rzepczynski, an economist at Lakewood Partners, “so forget effort sympathy and just look at the numbers and the process.”
Ability to shut out the world. “It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind,” warned Livermore.
“The public should beware of explanations that explain only what insiders wish the public to believe,” he said.
Client letters, TV appearances, interviews and speeches tell you a lot about someone’s personal convictions but usually very little about their motive for making them public.
There’s good reason to mistrust those who share their trade secrets. As Albert Thomas, a floor trader on the Chicago Exchange, put it: “All that garbage that they tell you every day about what a great stock this is — forget it!
“When they have the CEOs on-screen talking about their companies, good gosh, you don’t need two brain cells to rub together to know that this guy is not going to tell you anything bad about his company.”
“Rarely do more than three or four variables really count,” says investment adviser Marty Whitman. “Everything else is just noise.”
THE PUBLIC SHOULD BEWARE OF EXPLANATIONS THAT EXPLAIN ONLY WHAT INSIDERS WISH THE PUBLIC TO BELIEVE