A version of this article originally appeared on Fool.com
WASHINGTON, DC — There are many different paths to success in investing. I can give you examples of successful value investors, growth investors, macro investors, traders, bond investors, real estate investors, and more. They all have one thing in common, though: Successful investors never give up.
The most important characteristics of the best investors are grit, self-discipline, and the ability to survive over the long term. Read on for more about how the best investors stay successful in investing and what you can learn from them.
Toughing it out
While there are countless books on how to get rich quick, make money easily, and attract success with positive thinking, the truth is that successful investing is hard.
Investing is simple in theory, but not necessarily in practice. Investing can be discouraging, gut-wrenching, and exhausting. Those who succeed are the ones who are able to stick with it.
Psychology research by Angela Lee Duckworth of the University of Pennsylvania has shown that “grit” (defined as the tendency to sustain interest in and effort toward a very long-term goal) and self-control (defined as the voluntary regulation of behavioral, emotional, and attentional impulses in the presence of momentarily gratifying temptations or diversions) are two of the keys to success in any endeavor. Investing is no exception.
Whether your strategy is index investing or a more active form of investing, those who succeed in investing are those who are able to compound their money over the long term by staying in the game and keeping control of their emotions. This goes for passive investors, traders, fundamental investors, or anyone investing. The market will jump around, there will be manias and panics, and there will be lots of noise, but in the long run the best strategy is to stick to your plan and stay in the market, which has averaged annual returns near 10% over long periods of time.
Notice how staying invested and taking advantage of compound interest can build your wealth exponentially, even given subpar returns:
|
|
2% Return |
5% Return |
8% Return |
15% Return |
|---|---|---|---|---|
|
Initial investment |
$1,000 |
$1,000 |
$1,000 |
$1,000 |
|
Value after 5 years |
$1,104 |
$1,276 |
$1,469 |
$2,011 |
|
Value after 10 years |
$1,219 |
$1,629 |
$2,159 |
$4,046 |
|
Value after 15 years |
$1,346 |
$2,079 |
$3,172 |
$8,137 |
|
Value after 20 years |
$1,486 |
$2,653 |
$4,661 |
$16,367 |
|
Value after 30 years |
$1,811 |
$4,322 |
$10,063 |
$66,212 |
|
Value after 40 years |
$2,208 |
$7,040 |
$21,725 |
$267,864 |
|
Value after 50 years |
$2,692 |
$11,467 |
$46,902 |
$1,083,657 |
While it may be scary to invest at times, it’s important to stay disciplined and stay invested. As John Griffin of Blue Ridge Capital wisely said, “The future is uncertain; it is always a difficult time to invest.”
Having a process to deal with market fluctuations is key to keeping your wits about you when everyone else is losing theirs. For passive investors this means dollar-cost averaging, continual rebalancing, or other forms of automatic investing. For value investors, it’s the idea that the market is there to offer you prices for your investments that may be completely different from their intrinsic value, and you don’t have to accept those prices all the time.
Everyone has a different way of understanding the markets and dealing with fluctuations. The important thing is to have your own process for sticking with it over time.
Survival
One of the popular sayings in business right now is that “failure is good.” It doesn’t work that way in investing. To be successful over the long term, you need to play it smart and avoid huge losses in your pursuit of big gains.
In good times, people often take risks with significant portions of their portfolio or use borrowed money to enhance “safe” investments. Either way, if your investments tank, everything you did before then doesn’t matter financially. As Berkshire Hathaway CEO Warren Buffett has said, “Over the years, a number of very smart people have learned the hard way that a long stream of impressive numbers multiplied by a single zero always equals zero.”
Buffett and his partner Charlie Munger are celebrities in the investing world. However, few people know that they used to have a third partner: Rick Guerin. Guerin was in a hurry to get rich and was borrowing money using margin loans to invest in the stock market. In the market downturn of the early 1970s, when the stock market dropped roughly 70%, Guerin got margin calls and was forced to sell all of his Berkshire Hathaway stock to Buffett at $40 per share to get money to pay back his debt. Those Berkshire Hathaway shares now trade for just over $200,000 each.
While we can’t avoid mistakes entirely, we can prevent mistakes that have the potential to ruin us. Borrowing money and taking significant risks for short-term rewards can work for a while, but it can also deal a serious blow to your finances that takes years to recover from.
Investing is a lifelong journey, not a sprint. A commitment to learning how to invest and sticking to it through thick and thin is key to the success of all investors.
