I wrote about it some time ago Courage as a vital characteristic for investorsThis sparked some email exchanges with younger readers who’re at an earlier stage of their careers as financial analysts and asset managers.
In general, the discussions revolved around the talents that a successful analyst and investor must have. And while passion for markets and determination are key traits, I consider others are more fundamental.
First, there’s cognitive ability, which is the flexibility to think analytically and logically. Investing is a numbers game that requires analysts to know mountains of information at every level, whether it’s concerning the economy and markets as a complete or about individual stocks and bonds. Without good cognitive skills, I do not think an analyst has the inspiration to achieve success.
A Study by David Gill and Victoria L. Prowse The authors examined the personality traits and talents of individuals in childhood and the way these influence success in various school subjects, the kind of employment students ultimately pursue, and their income.
It will come as no surprise to you that children with high intelligence and powerful cognitive abilities usually tend to excel in math, science, and English classes than in the humanities, sports, and hands-on classes like shop. (Yes, these stereotypes are true, a minimum of statistically speaking.)
And this education in math and science strengthens their innate cognitive abilities and leads them to decide on careers that match their talents. As young adults, individuals with these characteristics usually tend to advance into managerial and technical positions and advance into careers reminiscent of medicine, teaching, engineering, finance and law. As a result, additionally they have higher lifetime earnings, as managerial and technical careers and these jobs are likely to be higher paid.
So in case you lack analytical and cognitive skills, you are unlikely to achieve success as an investor. Yet most individuals who work in finance as analysts or asset managers possess these qualities. This raises the query: what separates good investors from the common?
I believe it comes right down to two characteristics.
Those who give attention to individual stocks and bonds are likely to do higher once they’re diligent. Working through a financial report with all its footnotes and asking probing questions during earnings announcements isn’t any easy task. And the more diligent analysts are, the more likely they’re to search out the flaw within the story management is attempting to tell. Let’s face it: No CEO is ever going to inform investors that he thinks the corporate is on the verge of bankruptcy or faltering for other reasons. The job of investors and analysts is to determine whether their knight in shining armor is actually as shiny as he seems.
In probably the most extreme cases, careful evaluation, critical considering, and complex management can uncover fraud. Take the Enron case 20 years ago. Most analysts were fooled by the corporate into believing all the things was great. Yet some questioned the corporate’s accounting practices and use of special purpose vehicles (SPVs). This research led some to conclude that Enron was a fraud. These are the analysts you should discuss with because they add value and enable you to perform higher. The remainder of the group who’re simply buying into the hype might be safely ignored. They won’t make you any money as an investor.
In addition to those analysts, there are the overall fund managers, strategists and asset managers who don’t delve deeply into company financial reports. For these investors, due diligence is less vital and fewer of a differentiator. You can literally outsource this capability to research analysts who cover individual stocks.
But members of this group need one other quality that makes the difference between average and top performers: creativity. And I do not mean creativity within the sense of painting or performing in an amateur theater troupe. Those are nice hobbies, however the type of creativity that sets you apart as an investor is the flexibility to see data and markets otherwise than everyone else and to place the pieces of data together to create latest insights.
Additional achievement comes from doing what others don’t do and truly standing out. What does that mean in practice? That’s unimaginable to say. There are so many alternative ways and I’m not going to let you know how I attempt to do it because that will take away my edge. So all you’ve got to do is turn into a customer of my company, read my notes and schedule some meetings with me. If you have not already done so.
But coming back to the study: Gill and Prowse show the clear advantages creativity can have in life. Creative persons are more prone to find yourself in the chief suite and well-paid technical positions. The effect of creativity is a couple of fifth as strong as that of cognitive ability, but it surely is a combined effect.
The message is evident: cognitive skills are the inspiration for achievement in investing, but creativity gives you that little something extra that sets you other than others.
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Photo credit: ©Getty Images / Andrei Metelev
