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 (identified on my "Investing Pyramid of Success" above) that enable investors to achieve a substantial level of success. 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 -- these cornerstone skills are especially important for us 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 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) developing 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 and desire 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 increase our knowledge to improve 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'; and
- utilizes those key qualities that are already your strengths; and
- work to improve on those personal characteristics that you have identified where you need improvement.
The pyramidal format of my "Investing Pyramid of Success" shown above was developed from legendary teacher and basketball coach John Wooden's "The Pyramid of Success". Below is a photo of Coach Wooden's "Pyramid" which is prominently displayed on the wall directly above my office desk in my home -- a periodic source of wisdom and inspiration to me over the past several decades. These are his core concepts about "success" that he taught his players at UCLA -- success in basketball but also in life.
For a larger view, click on the image above.
Hopefully, this post has provided you some food-for-thought as related to your own investing capabilities and processes.
Best Wishes and Godspeed to All,
Jeff
