The 25 Habits of Highly Successful Investors: How to Invest for Profit in Today's Changing Markets

INTRODUCTION

Investing Can Be Habit Forming

Motivation is what gets you started. Habit is what keeps you going.

—Jim Ryun, former world record holder, one mile run

You have some money to invest. Now what?

Maybe you’ve been investing actively for years, but you’re not that happy with your results. Up one year, way down the next, then sideways in a third year while the markets marched steadily upward.

Isn’t it a little like golf or some other precision sport? You play a really good round one day, really bad the next, and a few good holes in an otherwise pretty dreary round the following week. Or cooking. You do a really awesome puffy pancake one Sunday morning; then the next Sunday it does a face plant on the bottom of the pan and you burn it. On the third Sunday it’s okay, but the kids aren’t smiling about it anymore.

Sheer instinct in any of these situations makes you want to climb back into the saddle. As in golf or cooking, you would like to improve your investing techniques and intuition. You would like to keep doing it yourself—mostly yourself, anyway. You want to get to the point where you can do it (1) well; (2) with some consistency; and (3) without blowing your mind trying to remember what you did the last time.

Like these other skill-based activities, you approach your investing to (1) achieve or exceed your expectations; (2) be consistent and reliable; and (3) do it without beating your brains out or spending hours of precious personal time on it.

You can argue that good investing is a matter of skill, experience, foresight, time, energy, and a fair dose of luck. All of the above are involved in golf and cooking, and I would submit that they’re all involved in investing. But, especially in today’s world (for most of us, anyway) of other priorities, where we can’t—or don’t want to—spend the day in front of the computer checking and analyzing investments, good investing requires good habits.

Without good habits, you may find yourself stuck in a pattern of lackluster, inconsistent investing performance. With good habits, you’ll be right more of the time (notice I didn’t say all the time). You’ll feel better and sleep better because you did the right things. And you’ll take less time—or spend more productive time—to do it.

In that spirit, I offer you The 25 Habits of Highly Successful Investors.

What Do I Mean by Habit?

When you think of the word habits, what comes first to mind? For most of us, especially prior to the advent of Stephen Covey’s 1989 blockbuster, The Seven Habits of Highly Effective People, the word habit probably conjured up the notion of bad habits such as smoking, drinking, cracking your knuckles, or tapping on the dinner table with your fingernails. Habits that are bad for you, annoy others, or some combination of the two. Not a helpful concept for an investing book, right?

The 25 Habits of Highly Successful Investors isn’t about kicking bad investing habits. It isn’t necessarily about turning the things you do already into habits, although I’m hopeful that you’ve been doing at least some of these things right already.

It’s really about structuring some of the things you do and have experienced, together with some elements of investing that you probably don’t do and haven’t experienced, into a smart of repeatable exercises that ultimately improve your investing performance. If all goes well, 25 Habits will improve your performance while taking less of your time (or at least investing more of it wisely) and making you more comfortable with the whole investing process.

Straight Out of the Dictionary

I have a habit of using dictionary definitions to highlight terms in titles or concepts I want to discuss. Accordingly, here’s the dictionary definition for habit from the Free Dictionary by Farlex:

A habit is:

a.  A recurrent, often unconscious pattern of behavior that is acquired through frequent repetition.

b.  An established disposition of the mind or character.

As an investor, particularly a time-constrained investor, which most of us are, you should establish a routine. Instead of approaching each investment decision as if you’ve never made one before, you want a proven method that works for you. You want a method that is repeatable. You want a method that is a process, but is a process simple and clear enough to follow without spending undue time thinking about it. You want to concentrate on the result, and that result is guided by what becomes a pattern of behavior, an established disposition of the mind or character—something repeatable over and over without thinking about it too much.

Where Do These Habits Come From?

The chains of habit are generally too small to be felt until they are too strong to be broken.

—Samuel Johnson, British author and lexicographer

This book is dedicated to setting forth twenty-five chains of habit I believe make sense for today’s informed, long-term, goal-oriented, individual investor. I have culled from my own forty-four years of personal investing experience and the experience of other icons of a habitual, value-oriented investing style, namely Warren Buffett, Peter Lynch, Benjamin Graham, and other followers of that investing school.

Once again, I have thrown in some terms. Long-term, goal-oriented, individual investor, value-oriented investing style. Before going further, we should take a short side trip into what I mean by each of these terms:

Long Term

You hear the term all the time—yet—what really is the long term for an investor? We hear a lot about buy and hold, and many of us at one time or another have done it. (Or our parents did. Mine bought thirty-five shares of General Motors and stuffed the certificate in a safe deposit box. From that time forward they bought only GM cars. They apparently intended to hold the stock forever.) That was in an era where change came more slowly and industries lasted longer—think about railroads, radio, the auto industry—significant change took thirty, fifty, even 100 years to occur. Today, industries change much more rapidly. Think about plays in the Internet, PC, restaurant, or entertainment businesses for just a few examples of industries that change rapidly or even run their course in five, ten, or twenty years. Indeed, even stalwart Microsoft has defended against its antitrust suitors on account of its fears about survival, not against competitors, but against technological evolution and eventual demise of the PC. So what is long term? For any given investment—maybe five to seven years, depending on the industry.

Goal Oriented

This sounds a bit fluffy, but what is your investing goal? Fast, short-term cash? Longer-term growth? To hit an eventual number for college education, retirement, or simple financial security? The approach in 25 Habits has a foot in both camps—to achieve long-term, relatively risk-averse growth, with a modest amount of cash return thrown in during the meantime to enhance your total return and pay yourself now. Another goal: to achieve a modestly better return—a few percentage points better than the overall market return with lots of singles, doubles, and base runners, not so many home runs and strikeouts.

Individual

25 Habits is aimed at the individual investor, that is, the investor who takes charge of his or her own investments. Such investors may do all of their own investing, or may throw some or all of their investing decisions over the wall to a professional adviser or fund manager (mutual funds) or index creator (ETFs, or Exchange-Traded Funds) to balance their decision making and lighten the load for at least part of the portfolio. The individual investor making his or her own decisions follows habits, while the investor working with or through the adviser looks for evidence that a professional adviser is on board with some of the more important ones. Incidentally, Habit 9: Appraise Funds Realistically, is about making sure a fund is worthwhile and is in sync with your investing objectives.

Investor

You’re not a trader, not a speculator, not someone climbing on board with the latest investing story like Facebook or Webvan years ago; you’re not someone looking for something to brag about at the next cocktail party. 25 Habits investors look for solid longer-term returns on their precious capital deployed rationally in good businesses, and they invest in shares of businesses as if they’d like to own the whole thing.

Value Oriented

This book follows the so-called value school of investing. Value investing takes a rational view of the financial and intangible fundamentals of a business and values that business simply in terms of what cash return you will net from it over the course of ownership—nothing more or nothing less. When you invest, you look at that intrinsic value against the price of the business—the share price. If it looks like a bargain, that is, if the price gives you a margin of safety, you buy it.

As suggested above, 25 Habits is drawn from my own investing experience but is heavily influenced by the icons of value investing, especially Warren Buffett. The Buffettonian style, which considers the growth potential to be an important component of value, is my primary inspiration—which, incidentally, dismisses the notion held by many mutual funds and their followers that a fund must be categorized either as growth or value.

Former Fidelity Magellan fund manager Peter Lynch gives us the notion in his One Up on Wall Street and elsewhere that the best businesses are the ones that look good on the street, that is, on Main Street. The basic question is, are they succeeding in the marketplace? If they are, then they will succeed in the stock market eventually as well.

This and my own personal experience drive home the notion that future financial performance is at least as much a function of future marketplace performance and other strategic intangibles and less a function of past financial performance. It’s this latter element that most investment analysts center on. As an investor, you’re really more interested in future results than past results. Thus, several of the 25 Habits are aimed at intangibles—Habits 13–15, Put on Your Marketing Hat, Put on Your Street Shoes, and Sense the Management Style. They offer tips aimed at assessing future performance.

To Whom Do I Speak?

With these ideas in place, what do I assume about you, your experience, and your base of knowledge?

1.  You’re busy. This isn’t what you do for a living. You have a day job or a retirement base, and you want to grow what you have or earn, but you probably have only a few hours a week, at most, to dedicate to your investments.

2.  You’re an investor. Not a trader, not a speculator, and not a market player. (There are lots of other books out there for that.) You’re investing for moderate longer-term return on your money.

3.  You’re a stock investor. Most of what I talk about involves the purchase and ownership of stocks, not bonds, gold, other commodities, real estate, money market instruments, and other investments. Although some principles, like Habits 23–24, Don’t Marry Your Investments and Sell When There’s Something Better to Buy, do apply.

4.  You’ve done this before. In 25 Habits, I don’t explain what the stock market is or how it works, how online brokers work, or how mutual funds and other types of investments work. The basis for this book is owning common stocks—shares of businesses you would like to own as a business.

5.  You want to do at least some of this yourself. The habits put forth are aimed at those of you who want to make at least some of your own investing decisions, although they can also help you ask the right questions of a professional adviser and analyze the performance of a fund manager.

RELATIVES ON THE BOOKSHELF

This book is intended as a stand-alone book. But it is also intended to dovetail with my series The 100 Best Stocks to Buy (coauthored with Scott Bobo), which is updated and published annually. In that series I apply most of these principles and habits to selecting the 100 Best Stocks. Therefore, if you want to see these habits in action, go there. If you came from reading a 100 Best Stocks book, you’ll find more here on how I selected them and how you can do it yourself. Either way, these books can work on their own but are really meant to be together.

The Three Cycles of Investing

Now, we get to a few words on the actual anatomy of The 25 Habits of Highly Successful Investors. In crafting 25 Habits, I felt it important to group or categorize the habits according to the three main activities you’ll do as an investor:

•  Developing your investing style. As an investor, the first and most comprehensive thing you do is to develop an investing style. Every investing style is different, for every investor has different needs and perceives how an investment meets those needs differently. If all investors did the same thing to achieve the same goals, there would be no real market; all money would flow to a few specific investments (which wouldn’t really happen, because nobody would sell them). Your style is a foundation, applied over and over and based on your needs, risk tolerance, and time, and added to by experience. You’ll develop and use some information and analytic tools along the way to make your style work better. I group six habits in Part I: Style for Success.

•  Buying a security. What most of us think about when we think about investing is the actual selection and purchase of a security—as addressed in this book mainly, investing in a stock. Here, you learn repeatable approaches for buying a stock like you’re buying the whole business, basing the decision on fundamentals, intangibles, and price. Twelve buy habits are presented as Part II: Appraise for Success.

•  Owning a security. What fewer investors think about—or at least, what they tend not to form good habits around—is what to do with a stock, that share of a business, once they buy it. How do you keep track? How do you verify that your investment is still the best place for your money? How do you manage the investment to maximize your return from it? When do you sell? These are all questions a small business buyer would ask about owning the business. The final seven habits are presented in Part III: Own for Success.

Ready? Here we go.

PART I

STYLE FOR SUCCESS:

CRAFTING YOUR INDIVIDUAL INVESTING STYLE

Some very talented and intuitive people can pick up a golf club and tee off without a hitch. Or they stand behind a podium and get their speech right the first time, right off the bat (pardon the mixed sports analogy). Don’t you hate them? For the rest of us, it takes some preparation to start and to feel good about doing something. We want to learn and think about it, and know the ropes (oops, there I go again) before we try. Eventually we all seek a reliable, repeatable style. Over time, we get the feel, and expect our style to improve. The same applies to golf, public speaking—and investing.

Part I provides six habits covering important techniques and thoughts to help you initiate—and refine—your own personal investing style.

HABIT 1

Know Yourself—and Know What to Expect

It’s a warm Friday evening, and you’ve settled in to watch Sleepless in Seattle or some other classic favorite movie on your DVD machine. Just as you hit the Play button, your cell phone quacks at you. It’s one of your old college buddies, Josh.

He asks you to go whitewater rafting tomorrow. It’s going to be hot. You’ll love it. C’mon, give it a try.

Uh, huh. Yeah, right.

You hate cold water. Really, you don’t like water, period, and you especially don’t like being in it. You don’t like slippery rocks. You’re not sure you’re up to the inevitable splash fights or free-fall (or so it seems) rapids or other chances you might take. And the mosquitoes and harsh sun—not to mention the potentially uncomfortable and silly chatter of old buddies of an era gone by.

But it does kinda sound like fun, doesn’t it? Might be just the thing for a hot day, and to reconnect with your buds. You might not only get a kick out of it, but also find a new activity and pleasure and something new for the future.

You should do it.

What do you do? What do you tell Josh?

Like most great adventures in life—at least those not entirely within your profession, your personality, or your daily comfort