What Makes a Good Investor

It’s been an evolution. At about age 23, when I was an ensign in the Coast Guard, I was plugging IRA contributions into a spreadsheet, assuming an 8% rate of return, and calculating that I would have $2 million when I retired. I failed to consider a lot of things, like:

• IRA contributions would go up over time.

• I would invest money outside of tax-advantaged retirement plans.

• I would make a lot more money than I thought I would.

• My rate of return assumption was actually too low.

• And this is the key point: There would be a lot of stress along the way.

It all seemed so simple, plugging those numbers into a spreadsheet and getting an 8% return. No stress. Let’s just say I’ve had a lot of volatility in my life, inside and outside the markets. We all do. I have a lot more money than $2 million now, and I’m still at least 15 years away from retirement. But it has been an adventure, to say the least. Lots of thrills and spills.

Sometime around 2012, when I was writing The Daily Dirtnap out of a small office in the Founders Centre building in downtown Myrtle Beach, I was doing a lot of thinking on the characteristics that make a good investor. Everyone has their own ideas, and I have mine. I was struggling at the time, both in writing and in trading, and I was wondering why some people had it so easy. 

Quick sidebar: On a trip to New York, I went to an idea dinner, and I met a guy who was an absolute douche. Turns out the douche was very wealthy and had a high opinion of himself. Apparently, he had entered a poker tournament and won $1 million and donated it all to charity—he didn’t need the money. Anyway, he and I were arguing about gold. We both agreed that there would be a lot of inflation, and he was telling me (in a very condescending manner) that the best way to play it was to be short bonds. In those days, people at hedge funds were buying call options on interest rates known as CMS caps. It was the fashionable trade at the time. I turned out to be right, but he had a phone number in his bank account. Years later, I would come to the conclusion that I would rather be rich than right.

So, what did this guy have that I didn’t? I decided to come up with a short list of characteristics that make for a good investor. This is what I came up with…

Intelligence

There is a strong correlation between intelligence and investment success. There just is. Yes, you occasionally have some bag-of-donuts guy blunder into a lot of money, but that is exceedingly rare, especially these days. Maybe there is some sophisticated pattern recognition going on. Maybe something else. If you think of all the world’s great investors, none of them are dummies: Eisman, Burry, Druckenmiller, Einhorn, Gundlach—Gundlach, in particular, is a genius. I’ll also add that you don’t need a 200 IQ to succeed at investing, but you had better be in the 99^th percentile.

Smarter people are better investors. This is a fact.

Experience

Speaking for myself, I have gotten a lot better at investing over time. I used to obsessively buy garbage. I used to love charts that were in the lower right-hand corner. I still do, though today, with 27 years of experience, I know that you can’t just monotonically be a value investor all the time—sometimes you have to chase momentum. Sometimes you have to buy the upper right-hand corner of the chart. The one thing you start to figure out when you are in your third decade is that there are no rules, and there aren’t even any guidelines. You do what works. You do more of what works and less of what doesn’t. And then you have the sense to get out before the top.

You don’t learn these things from books or YouTube videos. You learn it over time, in the arena, making mistakes, getting you head caved in. For the first 10 years of my personal investing career, I would guess that my rate of return was in the low single digits. Last year, in my personal account, I made 52%. Some of that is luck, but some of that is also putting yourself in a position where you can be positively exposed to luck. You get better over time—it’s as simple as that.

Emotional Fitness

Happy, confident people make money in the markets. Neurotic, sad people do not. It’s all about having a positive attitude. It’s all about behaving with some equanimity in the face of losses and knowing that the next great trade is right around the corner. And if you miss it, there will be another one. Also, it is hard to take risks when you are neurotic and sad. I had terrific mental health issues for the first seven years of my investing career; hence, the low single-digit returns. You can’t make money if you have obsessive thoughts or self-centered fear. I’ll add that substance abuse and addiction doesn’t help either.

If you are looking for a money manager, you should find the person who has their act together, mentally and spiritually.

Introspection

In investing, you not only have to be thinking, but you also have to be thinking about thinking. You have to be thinking, but you also have to be thinking about your own thoughts, and you also have to be thinking about thinking about your own thoughts. You have to do a lot of introspection. I’ve never known a successful investor who was not introspective, and careful, thinking about ways a trade could go wrong, as well as ways that a trade could go right. All successful investors are really amateur psychologists and philosophers and game theorists and poker players. It’s a big mental game, and the deepest thinkers come out on top.

This Is How You Do It

That’s it, that’s my list. Maybe you have some other ideas. Maybe you think that someone needs to have balls to be a great investor. Well, I’d slot that in under emotional fitness. Also, I don’t think you need to have cojones to be a great investor. If you consistently crank out about 20–25% a year, year after year, you are a billionaire. You don’t need to be making triple-digit returns. You are rolling the rock up the hill—it is a grind, for every basis point.

I’ll add one more to the list: Patience. Great investors are good at waiting, and they are good at being uncomfortable with their feelings while waiting.

If you want to get better at investing, this is how you do it. Thanks for coming to my TED Talk.

Jared Dillian, MFA

P.S. If you missed the show in Vegas, I’ll be in Nashville on March 5 at Night We Met playing my trademark brand of melodic house. Night We Met is a classy underground club in the Gulch, with a great sound system. You can get tickets here. Remember, luck will never find you in your apartment.