The 4 Qualities That Take An Investor From Good to Great


As thestock market plunged in 2008 (for the second time in less than a decade), many people concluded the world ofinvesting was just too risky.

Yet since the market bottomed out in early 2009 and has doubled in value in the subsequent four years, many of those same people are starting to wonder if avoidingstocks is the wisest choice.

For many people, the answer is easy.Put away somemoney every year in a solidmutual fund orindex fund , and let nature take its course. Studies show that holding onto a broad-based diversifiedfund for many yearswill always grow in value faster thancash sitting in the bank.

Another cadre of investors would like to exercise greater control over their financial future. These are the folks who read the business section of the national newspapers, buy the occasional financial guide at a local bookstore or tune in to the nation's top business shows.

Are these folks prepared to be active investors? There are basically four qualities an active investor needs. Do you have them?

1. A strong stomach
As the past half decade has shown us, the market repeatedly rises and falls (though it invariably makes new highs over longer time frames). Yet here's what they don't tell you. Stocks climb slowly and fall quickly. The plunge in 2008 and early 2009 wiped out many years' worth ofgains .

And even as the S&P 500 has rebounded nicely in recent years, it often still feels like a roller coaster. In the first part of 2010 and 2011, early year gains were met with a much sharper summer-time swoon. In 2012, the downturn wasn't as deep, but the nearly 10% loss in just one month (May) was enough to shake investors' faith yet again.

We're off to a similarly robust start in 2013, and when the next inevitable sharp pullback comes, investors will need to show real fortitude. If you can emotionally handle the scary times, then you're off to a good start as an investor.

2. A talent for math (or at least not a fear of it)
There's another key toactive investing , and you'll soon discover if you have what it takes. Although most people are pretty good at arithmetic and algebra, investing requires an especially strong aptitude with numbers. Over the course of just one hour of investing, you're likely to come across dozens of sets of figures and ratios, and you'll need to quickly, intuitively grasp the relationships between these numbers.

If you're taking a great deal of time to compare thebalance sheet ratios between IBM (NYSE: IBM ) and GE (NYSE: GE ) , then you'll be exhausted by the time you have gone on to the next phase of your research. The best investors, indeed, the only investors who remain active over many years, can usually make instant calculations in their heads. If math isn't your strong suit, then active investing may not be for you.

3. A willingness to sacrifice your time
There's a reason why viewers of CNBC tend to be older, and often retired. Keeping up with general business trends, and then finding the time to continually research the stocks andfunds you already own (or are looking to buy) takes a huge amount of time. If you hold down a full-time job, then your investment-related research may have to wait until the weekend -- right at a time when you should be relaxing from the work week.

How much time are we talking about? Count on spending at least five hours per week to be an adequate stock picker, and closer to 10 hours per week to become a proficient investor. [My colleague Andy Obermueller explores exactly these kinds of finds, revealing the next big, life-changing investing idea in his Game-Changing Stocks newsletter. See his latest report for more ground-breakinginvestment plays.]

The key is to stay focused. Many investors mistakenly try to absorb huge amounts of information provided by various media outlets andWall Street research departments. That only helps you to have a broad, but shallow understanding of keyissues that will boost the value of your portfolio. It's wiser to focus on less than a dozen companies -- or even just a few industries -- and concentrate all of your efforts there.

4. Comfort in your investing skin
The fourth ingredient isn't something you're born with; it's something you develop: wisdom.

Even the best investors made plenty of mistakes early in their investing careers, but by learning from those mistakes, they gradually improved. Years later, these same investors have the same accumulated wisdom as the investment world's top performers.

Action to Take --> Until you feel ready to strike out on your own, there are ways to ease into the market. A number of friends in their 50s and 60s have approached me over the years, asking if they should become active investors. Considering it can take more than a decade simply to become an experienced investor, I usually suggest they buy a great index fund (such as the Vanguard S&P 500ETF (NYSE: VOO ) , which carries an absurdly low 0.05% annualexpense ratio ). This fund provides direct exposure to the top U.S. companies -- without the hassle of investment research.

This article originally appeared on
The 4 Qualities That Take An Investor From Good To Great

-- David Sterman

P.S. -- Chief Investment Strategist for Game-Changing Stocks Andy Obermueller has found an opportunity you'll want to know about. Here's what he has to say: "My research team and I have spent the past several months looking for the 'next big thing'... What we've found will surprise you. This investing opportunity is so powerful, that we think it could actually solved high unemployment problems, put an end to the U.S. trade and budget deficits, and bring on the third industrial revolution." Click here to learn more.

David Sterman does not personally hold positions in any securities mentioned in this article. StreetAuthority LLC does not hold positions in any securities mentioned in this article.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.

This article appears in: Investing , Basics

Referenced Stocks: GE , IBM , VOO

David Sterman

David Sterman

More from David Sterman:

Related Videos




Most Active by Volume

  • $15.56 ▼ 1.46%
  • $7.62 ▼ 1.93%
  • $27.25 ▼ 0.11%
  • $124.75 ▼ 1.13%
  • $8.79 ▲ 1.27%
  • $58.42 ▼ 2.09%
  • $41.615 ▼ 1.29%
  • $106.01 ▼ 1.56%
As of 4/17/2015, 04:15 PM

Find a Credit Card

Select a credit card product by:
Select an offer:
Data Provided by