The game of investment as any other game requires certain qualities and virtues on the part of the investor to be successful in the long run. What are these qualities? While the lists prescribed by various commentators tend to vary, the following qualities are found on most of the lists.
1. Contrary thinking
4. Flexibility and openness
Before we dwell qualities point needs to be emphasized. Cultivating these qualities distinctly improves the odds of superior performance but does not guarantee it.
Traits of the Great Masters:
The strategies employed by great masters (investors) based on analysis is prepared and given under considering the most common traits:
1. He is realistic
2. He is intelligent to the point of genius
3. He is utterly dedicated to his craft
4. He is disciplined and patient
5. He is a loner
Investors tend to have a herd mentality follow the crowd. Two factors explain this behavior. First, there is a natural desire on the part of human beings to be a part of a group. Second, in a complex field like investment most people do not have enough confidence in their own judgment. This compels them to substitute others opinion for their own.
Following the crowd behavior however often produces poor investment results. Why? If everyone fancies a certain share, it soon becomes overpriced. Thanks to bandwagon psychology, it is likely teaming bullish for a period longer than what is rationally justifiable. However this cannot persist indefinitely because sooner or later the market corrects itself. And when that happens the market price falls, sometimes very abruptly and sharply causing widespread losses.
Given the risks of imitating others and joining the crowd, you must cultivate the habit of contrary thinking. It may be difficult to do because it is so tempting and convenient to fail in line with others. Perhaps the best way to resist such a tendency is to recognize that investment requires a different mode of thinking than what is appropriate to everyday living.
Being a joiner is fine it comes to team sports, fashionable clothes, and trendy restaurants. When it comes to investing, however the investor must remain aloof and suppress social tendencies. When it comes to making money and keeping it, the majority is always wrong.
The suggestion to cultivate contrary thinking should not, of course be literally interpreted the means that you should always go against the prevailing market sentiment. If you do so, will miss many opportunities presented by the market swings. A more sensible interpretation of the contrarian philosophy is this: go with the market during incipient and intermediate phases of bullishness and bearishness but go against the market when it moves towards the extremes.
Here are some suggestions to help cultivate the contrary approach to investment:
1. Avoid stocks which have a high price-earnings ratio. A high relative price – earnings ratio reflects that the stock is very popular with investors.
2. Recognize that in the world of investments, many people have the temptation to play the wrong game.
3. Sell the optimists and buy from the pessimists. While the former hope that the future will be marvelous the latter fear that it will be awful. Reality often lies somewhere in between. So it is good investment policy to bet against the two extremes.
More specifically, remember the following rules which are helpful in implementing the contrary approach:
Discipline your buying and selling by specifying the target pieces at which you will buy and sell. Don’t try overzealously to buy when the market is at its nadir or sell when the market is at its peak (these can often be known only with wisdom of hindsight). Remember the advice of Baron Rothschild when he said that he would leave the 20 percent gains at the top as well as at the bottom for others as his interest was only on the 60 percent profit in the middle.
Never look back after a sale or purchase to ask whether you should have waited. It is pointless to wonder whether you could have bought a share for Rs 10 less or sold it for Rs 20 more. What is important is that you buy at a price which will ensure profit and sell at a price where you realize your expected profit.