Top 10 Traits of Successful Traders and Investors

Everyone knows that to succeed as an investor or trader you must buy low and sell high. As
simple as this concept is, the actual act of doing so is almost impossible. That
is unless you are prepared (i.e. pre-programmed) to buy at low prices, or to
sell at irrationally high prices. Behaviorists suggest that we are pre-wired to
avoid pain and to pursue pleasure. Unfortunately, these instincts can work
against you in the financial markets. It’s painful and unpleasant when prices
are low and declining even further. It’s euphoric when markets are climbing
beyond rational levels of value. The following 10 traits of successful investors
may help improve your odds whenever the urge to buy or sell occurs.

Trait #1. The ability to buy stocks when everyone else is panicking, and sell
stocks while others are overly optimistic.
This has been a hallmark of the
world’s greatest investors since the days of Homer. J. Paul Getty remarked that
he got rich by buying when everyone else was complaining, and he sold when they
were celebrating. Mark Sellers told a graduating class of Harvard MBA’s that the
ability to succeed as an investor has nothing to do with I.Q. or education.
“Everyone thinks they can do this, but then when the market is crashing all
around you, almost no one has the stomach to buy.” Warren Buffett observed that
you always pay a premium for a cheery consensus.

Trait # 2. Having a methodology. Great investors have a system for weighing the
value of their investment holdings, which may be different from what the quoted
share price is. They make a fundamental valuation case based on share price
relative to revenue, free cash flow, earnings momentum, and the rate at which
shareholder’s equity is compounding. This approach allows you the luxury of
paying little or no attention to daily market fluctuations.

Trait # 3. Having confidence in your methodology. Sticking with your convictions
even when facing criticism or share price declines is essential. The natural
tendency for all human beings is to get confirmation from others that our
actions are proper and correct. When it comes to successful investing, the crowd
is often wrong.

Trait # 4. Having a purchase & exit strategy. Basing buying and selling
decisions on intrinsic value helps successful investors stick to their guns.
Buying and selling decisions are easier if they’re pre-determined, and well
thought out ahead of time.

Trait # 5. Being properly diversified, not overly diversified. Mathematically,
it can be shown that having too many stocks can actually increase your odds for
poor performance. Google the Kelly Formula, and you’ll find that owning only a
small 2% position in a stock is the equivalent of providing yourself a 51%
chance of going up, and a 49% chance of going down. Successful investors own
large positions in stocks they have conviction in.

Trait # 6. Living with volatility without changing your investment strategy.
Very few people can handle the volatility required to achieve great performance,
so they over diversify hoping to reduce their risks. Because volatility is
inherent in all markets, successful investors use these periods of volatility to
take advantage of price discrepancies. As can be seen by the accompanying chart,
the S&P 500 declined ahead of the collapse of Long Term Capital Management in
1998. The panic provided investors a window of opportunity at a time when people
were concerned about the survival of capital markets worldwide.

Trait # 7. Recognizing that volatility is not the same as risk. Sharp swings up
or down are not the same as a permanent loss of your capital, unless you panic.
When investors confuse volatility with risk, they often sell when they should be
holding or buying more. Successful investors benefit from irrational fears
during periods of excessive market swings. This 12-month chart of the S&P 500
suggests that opportunistic investors may soon be profiting from the panic of

Trait # 8. Learning from your mistakes. Everyone makes them. Successful
investors dwell on their errors long and hard enough to understand what they did
wrong, so as not to repeat them. Even better is the ability to learn from other
peoples mistakes so you don’t have to make them yourself.

Trait # 9. Understanding risk. In the words of Voltaire, “common sense isn’t so
common.” In every market cycle, we see evidence of this thru history’s frequent
booms and economic busts. Whether it’s sub-prime mortgages, real-estate, or
dot-com stocks, successful investors avoid potential problems by understanding

Trait # 10. Pre-programming yourself to take advantage of opportunity quickly.
Successful investors are comfortable acting alone, without the benefit of crowd
consensus. They are often selling when everyone else is clamoring for what
they’re unloading. They are buying when no one else is interested. What they
sell may go higher still, and what they’re buying continues to decline. But
successful investors pay no attention to the market’s short term moods, knowing
that with the benefit of a reasonable time frame, value always prevails on or
off Wall Street.

Gabriel Wisdom is a Founder and Managing Director of American Money
Management. He is also the President of AMM Funds, which includes two publicly
traded no-load mutual funds. A long time student of the financial markets, he
has helped to refine a value and momentum strategy based on fundamental,
technical, and sentiment indicators. Gabe’s views regarding business,
investments, and markets are regularly broadcast on national radio, and are
archived at