The Cardinal Virtues: 10 Qualities for Successful Investing
Today I want to try something a little bit different. I made you a cool present!
We’ll get to it in just a moment. First we need to do a quick update.
I spent most of this week adding enhancements to Alpine Advisor Pro. This is now our third issue and I’m very happy with how it’s progressing. I think it’s a valuable service and I think that it will continue to get more valuable. Plus, it’s tremendous fun for me to work on and I hope it shows in the product. This month’s edition is 29 pages and 9,000 words.
Click here if you want to download February’s Lite edition. I made some aesthetic changes and assembled a more comprehensive report that features content from the weekly newsletter as well. One of the things that I’m noticing as this list quickly approaches 200 subscribers is that a large number of these folks do not follow the Cognitive Concord newsletter.
My goal is to make Alpine Advisor Lite a standalone monthly product, so I’ve included a digest of some of the month’s blog highlights in the monthly report. If you’re an infrequent reader here at Cognitive Concord and don’t feel the need to consume every last detail, go ahead and sign up for Alpine Advisor Lite right now. We’ll send you all the juicy bits once a month in addition to the recap of our Dividend Income portfolio
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The Cardinal Virtues
10 Qualities for Successful Investing
I don’t know about you, but I’m a guy who really enjoys having structure in my life. Routines of every sort bring me immense comfort and reassurance.
There’s something endemic in human nature that attracts us to structure. We want to be better than we are and so we fix our attention on those we idolize, whether that’s Jesus Christ or Warren Buffet. We want to know what the good, successful people do — what are their routines? — because we want to emulate them and achieve that same success.
In the world of finance, one of my favorite examples of this is the Market Wizards series, by far the most comprehensive look at what makes up a successful investor. Each chapter is a portrait that inspires us, a study that we learn from. These books are, of course, required reading for anyone in the industry and they are fabulously entertaining even if you don’t work or play in finance.
There’s also Barry Ritholtz, who maintains my favorite modern chronicle of “Investing & Trading Rules, Aphorisms, & Books” on his blog. You can find his latest iteration of it right here. He brings a lot of great lists together as well as itemizing many of his own personal rules and principals to follow.
Those compendia all detail a lot of specific, concrete rules to follow. We like that. We like rules. Tell us exactly what to do and we’ll do it! We know how to follow rules and so we figure that if we follow someone else’s rules we can achieve someone else’s results.
That’s a great way to go. The trouble is that I’m the kind of guy who has zero problem breaking rules. I see rules more as psychological shortcuts — they help us be generally good people without having to think a whole lot about it. Unfortunately, I think a lot and I will happily, willful violate established convention when I conclude that the net social benefit of doing so outweighs the net social cost. As you can imagine, that’s landed me in plenty of hot water over the years, with professors, supervisors, and especially Mrs. Concord. One of the things I’ve discovered is that not everyone agrees with me on the specifics of benefit and cost.
In any case, the real issue with rules is that the rules of trading don’t always apply from situation to situation. Sometimes they do. But there are plenty of instances where you should do things like cut your winners short or let one position swell 20% beyond its allocation target. Slavishly following “rules for success” can have the effect of doing the exact opposite.
Basic, generic rules are probably best, and certainly the most timeless. But the less specific a rule, the tougher it is to follow, and therefore the less immediately useful it is to us.
I thought I’d try to approach this topic from a more abstract angle. I’m less interested in concrete guidelines and heuristics and more interested in fundamental qualities. What kind of person must one be in order to be a successful investor? What basic virtues must they possess?
I came up with ten.
My guess is that every successful investor in history shares at least 9 of these traits. They are common denominators among all the greats, and if you want to be great to, cultivating these virtues is probably a good place to start.
You can download a high-res PDF by clicking here. But I’ve also re-printed all the text below in case you’re reading this on your phone.
Virtues are attitudes. They are firm dispositions & perfections of intellect that govern our actions, order our passions, and guide our conduct according to reason and faith. Yes, faith. Perhaps nowhere outside the planes of theology and spiritualism does faith play a bigger role than that of capital allocation. Above all else, it is ourselves in whom we must place our faith. It is an unbendable, existential law. The virtuous investor understands this as well as its repercussions.
Virtues make possible self-mastery. They unlock the riches of a virtuous life. And they arrive by habit, acquired through diligent human effort and effort alone. With all due respect to Aristotle and St. Thomas Aquinas, this list must contain ten. Ten virtues, upon which all else hinges. None are easy; yet no exercise is more valuable than cultivating an intimate familiarity with all ten. They are the cornerstones of investment success and they pave the road to philosophical wisdom.
1 SELF-UNDERSTANDING. It all starts here. This is the big one, the alpha trait. Successful investors conduct an unflinchingly honest moral inventory of themselves. They acquaint their strengths and
practices. They compensate for their weaknesses. They would never think of trying to be something that they weren’t.
2 PATIENCE. It’s not just about having the patience to let a winning position ride until maturity, it’s about knowing how to sit quietly rather than allocate capital to inefficient places.
3 HUMILITY. Swallow your pride. The market is bigger, smarter, and more powerful than you. You are not special. You are not a beautiful or unique snowflake. Sometimes you will get it right and many of those times it will be because you got lucky. Showing humility in the face of awesome cosmic forces will be one of the best leaps of faith you’ll ever take.
4DISCIPLINE. Nearly everything in life that makes you a better person requires discipline. Physical fitness, intellectual growth, and mastery of craft. Investing can enrich your life, but only after sufficient discipline is applied. Discipline is what helps you do hard, necessary things, and it’s what keeps unproductive passions in check.
5 OBJECTIVITY. Being able to see the world for what it is rather than through emotionally or ideologically constructed biases is mandatory for long-term success. It requires leaving your feelings at the door and approaching the markets analytically. Listen to unfiltered data and invest accordingly. Stand above it all.
6 FORTITUDE. Nothing is more difficult than buying when the entire world is terrified to. And nothing is easier than reciting maxims like “buy when there’s blood in the streets.” Actually doing so requires tremendous fortitude. Selling when the world is overwrought with greed takes fortitude too. Be tough. Let the jeers and criticism roll off your back. Feel your skin harden.
7 PRACTICE. Only a handful of investors are blessed with what observers of other fields would describe as “God-given talent.” To be good at anything in life, we must practice. Practice in any endeavor correlates almost perfectly with the degree of success.
8 INDEPENDENCE. There’s less safety in the herd than you think. Herds are routinely led to slaughter all at once. Whether it’s the ability to adopt a bold, contrarian philosophy, or the willingness to push up your sleeves and tackle a job by yourself, independence is a virtue that opens doors and enables good things to occur.
9 FLEXIBILITY. Have an open mind and adopt flexible perspectives and positions wherever possible. Investors that lock themselves into single strategies and narrow-minded perspectives are invariably punished by the market. Beware, the market is a slippery, deceptive beast. Adapt or be eaten.
10 RESPONSIBILITY. Own your ideas. Own your successes. Own your mistakes. Successful investors don’t blame others when things go wrong. As an investor, you will not be judged by your errors, but rather your ability to take responsibility and learn from them.
Again, here’s that PDF. If you think it’s cool or useful, share it with your friends.
The specific inspiration for this format came from the modern philosopher Alain de Botton and one of the marketing pieces he distributed for his book Religion for Atheists. (Which, by the way, is a magnificent read1. It’s a must if you’re an atheist and even if you’re not, it’s still a thoughtful, friendly, and accessible work. This is not the aggressive, antagonistic atheism of Hitchens and Dawkins. De Botton is brimming here with compassion and respect.)
More Rules to Follow
Here’s another great list from my long-time colleague, Kyle Ferguson. He’s spent most of his career in the trenches of trading and he has a whole lot more service time down there than I. I’m a terrible trader and I see the world and the markets in a very different way than he does, which is a good thing!
It’s tremendously valuable to have that kind of perspective to bounce ideas off of (rule #9). I’m the kind of guy who’ll make fewer than a dozen moves in the course of a year while he’ll be in and out of the market a dozen times before lunch, having stolen several points from the S&P e-mini in the process.
I like his list because, like his trading style, it complements mine very well. There’s a bit of overlap, but not much. His list is much more pragmatic than mine and more immediately useful. My list is an inventory of abstract concepts. His is something you can implement exactly, in detail, right away.
Kyle’s 11 Rules for Healthy, Profitable Trading
- Know thyself — Know what you’re good at and what you’re not. Know what makes you nervous and what you’re comfortable with. Be honest.
- Treat it like a business — Trading is a business. Profits, losses, cash flow, assets, liabilities, equity. If you treat it like a hobby, it will treat you like a hobby and drain your bank account while occupying your free time. If you treat it like a business, it will pay you back with income and return on equity. Don’t expect to treat it like a hobby and have it reward you like a business.
- Have a why — Why are you trading? For fun? For profit? Why are you in the trade that you’re in? To be right? To pick up 2 points of movement? The nature of reasons matter far less than simply having them. Understand the “why” behind what you do and everything will be more meaningful, with better, more satisfying results.
- Have a plan — You won’t get anywhere trading without a plan. Plans are good because they help your brain work things out in advance. But they also offer guidance during moments of distraction.
- Always be evolving — Markets are shifty things. They evolve and change every day. If you don’t evolve your psychology along with them you will be left behind. Get better every day.
- Don’t pigeonhole yourself into a single style — If you paint yourself into a corner with just one style you will be punished severely during environments that aren’t responsive to that style. Being able to adapt your style and develop new ones as fashions change is critical.
- Pay for knowledge — Good knowledge and good data is invaluable. And good information costs money. Paying for it is simply one of the necessary fixed expenses of any trading business. Like any other aspect of consumerism, you usually get what you pay for.
- There is such a thing as too much information — At some point, information can become information overload. The noise is detrimental to your ultimate goal. Too much information actually hurts your trading. It causes analysis paralysis.
- Have someone to bounce ideas off of or find a mentor — Don’t trade in a vacuum. Few activities are more helpful than bouncing ideas off a trading buddy or a mentor. Through conversation and debate you will be forced to think about things in different ways. It will make your current practices more robust and help you discover profitable new ones.
- Exercise — Go for a run. Take a hike. Even a 10 minute stroll around the block will get the blood flowing and help clear your mind. In fact, nothing can get you back on track more quickly after a string of losing trades than a good workout. Incorporate this into your daily routine if you can. Exercise, even if it’s light exercise, will improve every other facet of your life, not just trading.
- Take a break — Whether it’s a day, a week, or a month, DO NOT let trading control your life. Take breaks. Control your life through trading.
See, I wasn’t kidding around: it’s a good list. Born entirely through real world experience. In particular, I really like his last two because these are tremendously overlooked in this industry. I rarely see those rules show up on any other lists like this. They’re every bit as important as rules like “buy when others are afraid and sell when others are greedy.”
I’m not an exercise nut, but I have a 7 year old Westie named Bishop and we go for walks on a regular basis. I queue up a bunch of Bloomberg Radio podcasts on my iPhone and work out my brain along with my body. The walking gets the blood flowing and when blood is flowing to my brain and my brain is stimulated, all sorts of awesome things can happen. Nearly every good idea I’ve had in the last 7 years has come from or been refined during one of these walks.
I’ve also always taken vacations very seriously.
When I’m working, I am 100% present in the endeavor. I don’t have Kyle’s or Bishop’s level of intense focus, but my brain has a knack for juggling multiple lines of thought at once, and is able to hop back and forth from task to task without skipping any beats. I’m never working on one thing, always two or three at a time — when I hit a 30 second wall with one, I’ll jump to the next project and work on that until I hit the next mental wall. My day typically starts around 4:30am and I’m lucky to have a job involves very little menial, mindless work. Everything I do within the course of a day requires substantial thought and I don’t take many breaks. By 3pm my brain is tuckered out.
The point is that after a while total productivity starts to diminish. The work of each day adds up and I get progressively less effective. It takes 50% more time to do the same job. So that’s when I unplug. I do it to recharge, but also, as Kyle mentioned, to regain control. I do the things I do to control my life. When those things start controlling me, I take a break, unplug, and reset my priorities.
Bishop spends half the day napping lazily away. I think it’s because when he’s awake and on the job he is so intense. It’s a terrier thing, and given how much time he spends sleeping, it must be exhausting. He takes breaks very seriously. I’ve learned a lot from my furry little friend in the last 7 years.
The Dow made a new all time high this week.
The S&P isn’t that far behind its own all-time high.
This was one of my official predictions for 2013, but I honestly didn’t think the market would be up nearly 10% after just the first two months of the year. Yet here we are. It’s an annualized return of 80%!
Everybody get in the market right now!!! If you’re not in you’re missing out!!!
How long will it continue to go in this direction? Forever?
I’m fascinated by how psychology has changed in the last 4 years, or even in the last few months. There’s so much fear still in the marketplace right now, but it’s fear of getting left behind or having missed the rally. Fears like that are usually given short shrift, but they’re worth thinking about.
I’ll have more to say about this next week along with the cycle of market psychology.
Stay tuned, and work on being a virtuous investor.
1The spiritual path I’ve walked to this point has been diverse and varied. I was raised Catholic and went through the typical rejection of faith during adolescence, an act that was amplified at that time by Ayn Rand and her philosophy of Objectivism. (That was back when Rand really was an interesting fringe philosophy and hadn’t been contorted into a series of Tea Party talking points or source of Liberal ridicule.) I lightened up in college when I discovered Alain de Botton and Hermann Hesse who indirectly led me into the world of Eastern thought and religions.
I’m not sure there is a lesson from any religion or school of philosophy that has impacted my life in a more profound and tangible manner than the Buddha’s teachings about desire and the nature of suffering. In the most basic sense, suffering results when reality fails to conform to our expectations for it. The only solution is meditation, an act where we abandon our egos, and leave our expectations for reality behind while we cultivate an awareness for the way that things really are.
I bring all this up today because this is an extremely important concept when it comes to investing. We need to be aware of the expectations we have for our investments and we need to understand the suffering that inevitably results when those expectations are not met. Suffering leads to unproductive and unprofitable behavior. We should strive to eliminate that suffering (and our original expectations) entirely. But at the very least, we benefit greatly from having simple mechanisms, rules, and routines in place to protect us from the negative behavior that follows in suffering’s wake.