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Saturday, June 6, 2009

Investing Pyramid of Success

Recently, I have been doing some soul-searching related to the topic of investing success by asking myself:
What personal qualities are most essential for achieving success in investing?

Before identifying and discussing these qualities, I'd like to clarify my perception of the phrase "success in investing". How do we measure our "success in investing"?
I am convinced that investing success is not an easily defined concept. In fact, since different people have different goals for their investments -- success will be relative, and that is fine. But irrespective of these differences, I'd encourage you to ponder the following question for yourself: What does "investing success" mean for me? Seriously, take the time to think about it, and then write a sentence that defines investing success for you.

I first began to develop my sense of what "investing success" means for me during a course in Engineering Economics in college. There, I learned about: (1) viewing corporate decision-making in terms of its return-on-investment(ROI); and (2) the power of compound interest; and (3) the concept of 'sunk costs'. Shortly thereafter, I began to grasp the applicability of these business concepts to investing when I read "How to Get Rich; Slowly, But Almost Surely: Adventures in Applying the Decision Sciences" by William Thomas Morris. Professor Morris was Chair of the Department of Industrial Engineering at The Ohio State University. In retrospect, this seems to be a mediocre book at best, but for this budding Industrial Engineer it provided some critically important links between my engineering education and my investing future -- but I digress.

So, my personal statement of "investing success" is:
To achieve long-term outperformance compared with the return-on-investment performance of the overall stock market. I won't be more specific now on what is meant by 'long-term', 'outperformance', or 'overall stock market'. These are topics for another time. But again, I encourage you to develop and then to write your own personal statement that defines what is "investing success" for you. After all, the first step toward achieving our own investing success is to define the goal we are seeking.

My thinking and research on this topic led me to identify five key characteristics that enable investors to achieve a substantial level of success. These characteristics are presented here as a pyramid. You might recall a prior article (Tribute to Coach Wooden) on this blog that described John Wooden's Pyramid of Success. My "Investing Pyramid of Success" is not only a convenient visual way to present the characteristics, but more importantly, it is a continuing tribute to the inspirational legacy of Coach John Wooden.

Each of these five qualities is worthy of extensive analysis and discussion. But I will provide only a brief overview of some essential aspects of each characteristic as they pertain to investing. As you consider each one, think about your own strengths and weaknesses in relation to the skills introduced below. The good news is that each of us has an opportunity to improve our abilities in each area if we are willing to work at it.

1. Analytical Skills -- this area is especially important for covered calls investors. Three key competency categories include:
(a) logical thinking -- an ability to think both comprehensively and objectively.
(b) critical analysis -- an ability to distinguish important and accurate information from irrelevant or incorrect information.
(c) quantitative abilities -- two especially important skills are:
(1) the ability to accurately estimate percent changes in our heads; and
(2) the ability to conceptualize potential outcomes in terms of their relative probabilities.

2. Emotional Maturity -- Along with analytical skills, the second cornerstone competency is Emotional Maturity. This quality encompasses:
(a) taking the emotion out of investing; and
(b) facing reality and dealing with it objectively; and
(c) confidence in our own independent judgment.

3. Curiosity -- The third 'foundational' quality that complements the cornerstone qualities of analytical skills and emotional maturity is curiosity. This ability is demonstrated by an aggressive willingness to learn new things and to build upon our existing knowledge.

4. Discipline -- It is critically important to establish and follow a well-defined and consistently applied investing process. In short, it is better to seek to become an expert in covered calls investing rather than a dilettante in numerous stock and option strategies.

5. Adaptability -- While being 'disciplined' is essential, that does not imply that we should be rigid in our approach. Rather, we should use our 'curiosity' to seek to continually improve upon our own investing processes.

Again, I would strongly encourage you to make an objective self-assessment of your own abilities in each of these areas. Then develop a self-improvement plan that:
- identifies and enables you to focus on a process that will help you achieve your own personalized 'investing success';
- utilizes those key qualities that are already your strengths; and
- work to improve on those personal characteristics that you have identified where you need to improve your abilities.

Hopefully, these comments have provided some food-for-thought as related to your own investing capabilities and processes. As always, your comments and questions are welcomed. Please provide them by clicking the 'comments' link below. If you prefer confidential communications, my email address is listed at the top-right sidebar of this blog site.

Best Wishes and Godspeed to All,



  1. Jeff,

    Nice post. I agree that these are all very desirable qualities for successful investing.

    Mike A

  2. Jeff,

    I noticed that you compare the Covered Calls portfolio against the Russell -- have you compared how you would do vs your own stock picks had you not sold covered calls?

  3. Anonymous,
    I like your suggestion, and will try to calculate that result and include it in my monthly 'Returns' posts at the end of each calendar month beginning this month.
    Thanks for the good suggestion,

  4. Jeff,

    I have the same China Mobile trade as you -- do you think it is worth rolling into the June 55s?