Dissecting the psychological makeup of master investors isn’t just guesswork — there’s been a ton of research into what behaviours top investors use to make their money.
The Big Five Personality Traits of Successful Investors
In 1970, Lewis Goldberg set out to create a sort of encyclopedia of personality characteristics. Out of over 1000 traits, he was able to create 5 buckets of positive personality traits: emotional stability, extraversion, openness, agreeableness, and conscientiousness. It’s a good framework to use as we look at how these traits impact investing.
First, some quick definitions of these traits:
Emotional Stability: Relaxed and calm
Extraversion: Social, feels comfortable in presence of others
Openness: Open to new ideas, perspectives
Agreeableness: Works well with others, values cooperation
Conscientiousness: Employs sell discipline, follows rules
The Traits of Great Investors
In turn, these “Big 5” traits were recently studied by MarkeyPysch (a firm that studies this kind of stuff) and broken down to examine exactly which personality traits are shared by top investors.
In a paper published last year, the research firm ranked these five traits for how well they performed, the size of losses they caused, and how likely they are to cause investor misbehaviour.
Here’s a list of the top 16 traits of top investors:
1. Open and agreeable to new ideas: Top investors are open to learning new things, objective in their analysis, and collaborate with their teams to find investment candidates.
2. Go with the flow, carefully: Long term investors learn how to let their winners run and cut their mistakes quickly. Investors who are resistant to change typically report suffering larger losses.
3. Not exactly thrill seeking, but not cowards either: Good investors aren’t gamblers at heart. They are brave face of uncertainty and plan a course of action. Top investors don’t shirk from decision-making.
4. Resilient: Top investors embrace life. Their optimism makes them resilient investors — even in the face of setbacks. They roll with the punches, even when the rules of the investing game change in front of them. This lowers risk, too.
5. Social individualists: Best performing investors are OK in social settings but they don’t necessarily seek out yes-men friends. They want to think objectively and go against the crowd.
6. Disciplined, but not to a fault: They follow a plan of action and stay consistent. But ultimately, they’re open to being convinced of a different plan of action, at any time. There’s no silliness or acting on a whim here.
7. What pressure?: When money is on the line, people make bad decisions. Investors who perform well stay cool and calm under this stress. By not procrastinating or acting impulsively, good investors make decisions quickly and avoid bad losses.
9. Avoids crowds: Crowded trades are the ones you find pundits on TV yapping about. By the time, these talking heads learn of the trades, top investors are long gone. They avoid stocks that are everyone’s favourites.
10. Doesn’t chase hot stocks: Good investors don’t typically chase after hot investment ideas — they’re patient and wait for stocks to come to them. Investors who like trend following or blindly subscribe to expert advice report larger losses when it all hits the fan.
11. Self-aware: Investing isn’t about ignoring your emotions. Interestingly, investors who aren’t aware of their own emotions are more susceptible to bigger losses. Good investors sense danger in their guts, process it, and make a decision with their brains. That feedback loop appears important for risk management.
12. Eats humble pie: Many investing legends are massively wealthy, yet they maintain a certain level of humility that’s essential to winning at the investing game. Overconfidence blinds good decision making, kills returns and makes us open to big losses.
13. Keeps fingers off the buying button: Market Pysch’s research shows that extraverts are more likely to buy stocks as they surge upwards as well as buy them on dips.
14. Stays out of the herd: Too many times we get sucked into doing what others are doing; Herding is a bad recipe for investing success. In an effort to blend in and keep social dissonance low, agreeable investors sometimes mistakenly buy high and sell low.
15. Keeps emotions in check: Emotional investors sell quickly when stocks go up. Locking in profits is never a bad thing but it appears to be the culprit for emotional investors’ lower overall performance.
16. Doesn’t seek to confirm, disproves instead: Confirmation bias — our human need to find evidence to support our own ideas — may be at work when emotional investors buy more stock when it drops. Buying more when a stock goes down (dollar cost averaging) lowers our entry point but it ignores why the stock dropped. Good investors re-examine constantly.
This type of study — examining the traits of top investors — is important because so many books and experts sell their “infallible investing systems” (buy this stock and you’ll profit 1000% in 3 days!). Of course, that’s hogwash — but, understanding the psychological makeup of profitable investors, we now have a blueprint of exactly who these investors are and how we can learn from them. That’s good — real good.