Skills and habits you need in investing

IT’S a new year once again. It’s a year to create good habits and acquire useful skills to become a better version of ourselves. Rather than telling you the next big investment idea, I would like to discuss some important qualities and habits that should help you become a better investor.

Reading. Nowadays there are numerous media to get information and learn from. There are online videos, audio books, podcasts and online courses. Then, there are books, e-books, articles and magazines for reading. Warren Buffett reportedly spends about five to six hours a day reading. He reads about five newspapers and at least 500 pages of corporate reports. He says that’s how knowledge works: ”It builds up like compound interest.” It’s not easy for most of us to find time to read but we could at least try by starting with a few pages daily. Good readers also read materials on a wide variety of industries. Don’t limit yourself to one industry or interest. You might not appreciate it at first, but any knowledge you acquire now could be useful in the future. From time to time, try making it a point to read something that you don’t necessarily agree with. It can give you a different perspective and enable unique insights.

Teachability. Someone who is teachable would want to continuously grow and learn. He would be constantly curious and respond according to the changing facts. He would absorb new information and would look for ways to improve his process. One should also be open to ideas and willing to change one’s mind when proven wrong.

Numeracy. Investing means understanding risk and returns and of course, numbers. You must be comfortable in looking at, analyzing and understanding numbers. You don’t need a calculus level of math to be considered numerate. Fifth grade math should be enough. Accounting is said to be the language of business. Great investors are skilled at financial statement analysis. It allows them to look at the past and project the future. Among things to look at are free cash flow, earnings, growth and return on invested capital. Numbers tell a story. Financial statements are the report cards of the companies. They are important in understanding a business. They tell you whether an asset is expensive or cheap or undeterminable. Price is what you pay. Value is what you get. Knowing these numbers helps you make the right decision.

Probabilistic thinking. The future is uncertain. Investing is an activity that involves predicting the future. A mindset of thinking probabilistically certainly helps. Always find your edge and only invest when the odds are in your favor. Increase position size when there is more certainty, and reduce it when more uncertainty exists. Opportunity comes when the price of the asset does not reflect the probabilities or the outcomes. Don’t look only at the right or wrong decisions but also at the process of coming up with these decisions. Good decisions could result in bad outcomes and vice versa. In the long run, however, the right decisions should have more positive outcomes.

Rational thinking. When Charlie Munger was asked: ”What one word accounts for your remarkable success in life?” He replied: “I’m rational.” He also said it’s a long process. ”Rationality is something you get slowly, and it has a variable result.” Given a choice between surviving and thinking short term or logical and long term our default is usually the former. It’s important to be aware of the behavioral biases that make us irrational. One good way to think about things is by inversion. Instead of asking how to be healthy you can ask how to destroy your health. Then avoid those things that make you unhealthy. There is also the confirmation bias where when presented with new information, our minds will mold it in a way to support our existing beliefs. Charles Darwin used this method to test his theories. Anytime he sees or has an idea contradicting his own theory he writes it down and tests it against his conclusions.

Focus. In a dinner which included Bill Gates Jr. and Warren Buffett, they were asked: “What factor do you feel has been the most important in getting to where you’ve gotten in life?” Buffett replied: “Focus.” Gates agreed. Research shows that most successful people owe their success not simply because of talent but to a lifetime of dedicated practice and training. Some people are more successful than others because they are better at focusing their mental resources on important things. A karate fighter could smash bricks with his bare hands by focusing all his strength on one specific spot.

With these skills and habits in hand, you should be able to have a better odds of being a successful investor.

Josefino R. Gomez is a registered financial planner of RFP Philippines. To learn more about personal financial planning, attend the 93rd RFP program in January 2022. For inquiries, email [email protected] or text at 09176248110.