Tuesday, December 9, 2008

5 Successful Traits of a "Successful" Investor

Notice I did not say trader. There is a difference between trading and investing and it is important to distinguish between the two. The problem is that these days the people who actively trade their portfolios are very vocal about the death of buy and hold and I believe are starting to win people over and fleece them into thinking that trading is the answer. Just listen to a podcast by Andrew Horowitz, and you will hear him go on and on about how wonderful he is because his trading style is working in THIS market and how wrong all the buy and holders were. This is based on 6-months of a very bad market. However 6-months does not a market make!

That is why in this post I have summarised the thinking I have done to get back to basics and remind myself of what really makes a successful investor. Here, in my mind, are the top 5 investor traits that will make an investor successful in all markets:

1. A Successful Investor will Focus on Asset Allocation Above Everything Else

Asset allocation has the largest input to return in an investor's portfolio and the "good" investor ensures that his/her portfolio is structured with a disciplined and diversified asset allocation. Research obtained from The Only Three Questions That Count shows that asset allocation makes up approximately 70% of a portfolio's return.

2. A Successful Investor will Have the Right Risk Profile for Them

I think the biggest problem for people in the past 6-months to a year of this market is that they did not REALLY understand their risk profile. This market caught millions of people off guard and the impact a down market can have. For example, there are numerous stories of seniors who have been all in equities losing 60% or 70% of their portfolio. Markets will always go down over short periods of time and if you have found yourself unable to stomach, or worse financially deal with, the volatility in your current portfolio then you are not as risk adverse as you thought. Successful investors know their emotional reactions to problems and structure their portfolio in a manner that minimizes the likelihood a emotional reaction will occur. The easy thing to do is be more conservative than you think.

3. A Successful Investor Always Has a Plan

Having a plan is all about goal setting and knowing where you want end up. The reason this is important is simply because a plan minimizes the likelihood that an investor will make unstructured and emotional decision. Of course this requires a good plan, which can be obtained by reading books such as Live It Up Without Outliving Your Money and the dividend classic The Single Best Investment.

4. A Successful Investor Buys When Others are Selling

Warren Buffett has said that you investors always pay a premium for a cheery consensus - such as when markets are constantly rising. However, when markets are crashing I believe that many investors will come out ahead over the long term through buying quality assets now that are priced at a discount. This can mean buying a big basket of individual dividend stocks or an index fund. It really does mean buy low and sell high. Even if we don't know what low really means, an disciplined investment strategy of buying consistently should come out ahead.

5. A Successful Investor Has a Long Term Focus

As I said, the anti-buy and holders are having a field day right now because in this market buy and holding has been a painful thing. However, most of the people I hear talking are looking at the market from a day-to-day perspective and not the long term game it is. Successful investors think long-term, and in my mind that is at least 10 years. 20 is even better. They key is ensuring your portfolio has the right allocation, is structured based on your true risk profile, is implemented according to a proven plan, and consistently buys good assets over time. This is where I spend my energy.

This article was written by The Dividend Guy. You may email questions or comments to me at info@thedividendguyblog.com.


  1. DivGuy, we know that in the long run that you are right. But, you have to admit that the last 10 years have been tough for many investors with solid plans. Have you ever short term trade?Would you consider doing it with stocks you know in conjunction with your long term view?

  2. OOPS. You made a few errors. First, I have been managing money professionally for 20 years. You?
    So, the past 6 month are a short example of how to handle money in a market storm. Trying to bring info to investors to help themselves get through these hard times.
    Second, the studies you reference are flawed and you should know that by now.

    Originally proposed in the 80's by Brinson, Beebower and Hood, the Determinants of Portfolio Performance tried to explain The bottom line? BHB concluded that asset allocation explained 93.6% of the variation in a portfolio's quarterly returns.

    If you recall, the error in most plans was that it was a bad (very bad) use of the word variation and it was shown not to be root cause or even correlation. So, your 70%, can you explain your math please. Or is this just some generality?

    Nice article to sell some books though. I just hope that the people following your shabby advice and "sour grapes" can buy it half off.
    Kindly don't disparage someone (even with a link) if you do not know all of the facts.

    Andrew Horowitz
    The Disciplined Investor

  3. Wow Andrew, thanks for visiting! That is quite a response you have put up here. I don't think that it was sour grapes since I have still been downloading your podcast - however as of right now I just removed it from my iTunes account.

    On the 70% number, ask Ken Fisher as it is where I got it from, as mentioned in the post.

    I have never heard you talk about your long term performance - only the short-term performance in this recent market. Impressive, but as I said investing is long term. I have no problem with short-term investors, only a problem with people aggressively marketing their investment style in a negative and sensationalistic manner. If your strategy is so successful then please show the long term numbers of your portfolio. As a professional investor, I believe it is your responsibility to publish your long-term performance. How have you done in the 20 years managing money.

    I am by no means even close to an expert investor, just one of the little guys trying to figure their way through this market. Anyway, thanks for visiting and for the nice tone in your response.


  4. Regarding Mr. Horowitz - it seems that he doth protest too much. He makes a point about 20 years of professional money management experience. I bet that the CEO's of Countrywide, Washington Mutual, Citigroup, etc. can all claim that much experience and more in the banking industry, but their companies failed and/or needed massive gov't intervention to continue to exist. Experience means nothing unless you do something useful and ethical with it.

    He reminds me of the secretary who demanded a larger salary without taking on any additional responsibilities solely because she had 20 years experience; however, the boss said no because he felt she simply had 1 year of experience, just 20 times over.

  5. Typically, I ignore response like Andrew’s. But here, I just could not resist and had to add my 2 cents. Yeah, if BHB studies done in 80’s explained the importance of asset allocation and these so called 20 years experts believe it, why the heck across the board we see negative performance. Didn’t these 20year experts learn their lesions from so called correct studies in 80s and make adjustments to their advice/portfolios. Knowing that asset allocation is biggest contributor, even after 20year expertise you cannot get it right? That’s one year expertise 20 times…..

    At least I know that if I disagree I need to provide a supportive reasoning…… and discuss it “professionally”. I learned this in two years (not 20years).


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