Ever wonder why some investors like Warren Buffett turn into billionaires while you’re just hoping your portfolio will outperform the DOW?
It’s not a coincidence that certain investors find success, while others never reach their goals.
There are certain characteristics that undoubtedly set investors like Mr. Buffett apart from the average investor…they simply do things differently.
To step into the shoes of a successful investor you must first begin to think and act like one. This means understanding their habits, and applying them to your own strategy.
Here are 7 habits of highly successful investors.
1. Conduct their own research
There’s an overload of investing commentary and analysis everywhere you turn. It’s on TV, the internet, in the pages of Wall Street Journal; you simply can’t get away from it.
While successful investors may incorporate other’s analysis into their own, they always make investing decisions based on their own research.
They’ve got a precise reason behind why they’re buying or selling a stock, and it’s not because they heard a TV analyst pumping the stock as a buy.
In order to reach your investing goals you must take the same approach with your own portfolio. Fail to invest based on your own research, and you’re bound for disaster.
[Related Tip – Keep Your Investing Strategy Simple]
2. Invest within their circle of competence
There are thousands upon thousands of companies to invest in. Lots have the potential to be good investments, but that doesn’t necessarily mean you should invest.
Because lots of them are in industries you’re not familiar with, sell to a customer base you don’t understand, and produce goods and services you don’t personally use.
If you’re disconnected with the business, it’s products, and the environment in which it operates you’ll find it much harder to make intelligent investing decisions. It’s a narrow road trying to find success investing in businesses you don’t understand.
Successful investors understand this, and focus their investing efforts within the their circle of competence.
What does this practically mean?
It means that if you work full time in the technology industry, bank at Citibank, and eat at Buffalo Wild Wings every Wednesday night then you should consider investing in their stocks, or closely related ones. You’ll already understand their business and it’s customers because you are one!
This is exactly what the strategy successful investors employ. They always invest in what they know, and stick to their circle of competence.
Warren Buffett doesn’t invest in technology stocks. It’s not that he feels great tech companies don’t exist, because they definitely do, but it’s simply not where his competence lies. Because of this, he stays away from them. He focuses his investment strategy on businesses within his circle of competence.
3. Diversify, but not too much
Diversification is important. It helps spread risk in case bad news hits a company or industry you’re invested in.
Wide diversification on the other hand isn’t wise – it causes investors to be spread too thin.
Successful investors are masters at diversifying their portfolio to optimally distribute risk, but not so much that they’re spread too thin.
For most investors, this means holding between 5 – 10 stocks at any given time. Any less and you’ll be too exposed when bad news hits. Any more and you’ll be spending too much time researching new companies, and too much time trying to keep up with the news of your current investments.
Remember, the foundation to making intelligent investing decisions is knowledge and analysis. The more you have, the better decisions you can make. Invest in too many stocks, and you won’t be able to keep a finger to the pulse of your investments.
[Related – Check out the best quotes from Warren Buffett]
4. Invest as if they’re buying the whole company
Too many investors buy stocks with the mindset that they’re just an obscure stock holder in a far away land.
While this might be true to an extent, this mindset can be disastrous. It leads investors to do more research on their next shoe purchase than their next stock purchase.
Successful investors have a different mindset – they invest as if they’re buying the whole company, not just the stock.
Focusing on the fact that you’re literally buying a piece, albeit a very small piece, of the company brings about a shift in mindset. The decision all of a sudden becomes much more personal. You begin to think and act differently. You’ll find yourself asking more questions, conducting more research, and taking a harder look at the management team to determine whether you feel they’re the team to lead the company into the future.
5. Think long term
Investing is a marathon, not a sprint.
Success is measured in years, not months. Successful investors don’t buy a stock with anticipation of selling it 6 months down the road. They seek stocks to hold for the next 6+ years.
Shorter term investing strategies can certainly be successful. While there’s no shortage of wealthy day traders, the most successful investors – the Warren Buffetts and Benjamin Grahams of the world all invest in stocks that they hold for much longer periods.
6. Are hyper focused on investing in quality companies
There a lot of noise in our media driven investing community today.
By turning on the TV, flipping the Wall Street Journal, or browsing through investment communities online you’re bound to hear about the hot stock of the day. It can be overwhelming at times; enough to make you second guess the investment you just made for another stock that’s all over the news.
Successful investors tune out all of this noise and are hyper focused on finding and investing in quality companies.
This means finding companies they feel have tremendous growth capabilities over the next several years. They don’t seek stocks on the front page of the Wall Street News, but rather ones with capable management teams, strong financials, and in growing markets.
All others fall by the wayside.
7. Have a well defined strategy
How can you be successful at anything in life without clearly defined goals, and a strategy for reaching them?
Becoming a successful investor isn’t based on luck, and it isn’t something that happens overnight.
It’s the result of years of properly defining, and executing a smart investing strategy.
This means determining:
- Your personal aptitude for risk
- When you’ll be needing your funds
- The types of stocks you should invest in
- How much of your income to invest
- What to do when the market hits a setback
Developing your strategy lays the foundation for your investing success. Without it, you’re setting yourself up for failure.