Common Traits of Successful Investors

By Patrick Sollee


What are the common threads between the investment strategies used by Warren Buffett, Benjamin Graham, Peter Lynch, CANSLIM (William O’Neal), and John Templeton? And how can an individual investor put them to use?


While the strategies of various experts differ in some specific points, the methodologies they use are all very similar. As an individual investor, following a similar path can improve your investment returns.


Below are some of the key similarities between these successful investing strategies.


Measure your Results and Document your Decisions


Although it may seem obvious, keeping track of how well your past individual stock purchases have done is an important step.  If, over time, your results trail the S&P 500 index fund, you should perhaps re-consider your approach.  Although it is painful to review mistakes, doing so will help you learn from them. 


As you make buy/sell transactions, document why you are making them. It should be your goal to make the best decision based on currently available information. You cannot predict the future, and you can prove this to yourself by documenting your forecasts. When unforeseen events occur (and they will!), you can go back and review your reasons for making the transaction. This will help you in deciding what you next move should be (buy, sell, or hold).



Remove Emotion from the Investing Decision


The market does not care what you think about a specific stock. In fact, since another party is always on the other end of your stock trade, there is another person that has the opposite view of you about the future prospects of that particular stock. When an investor buys a stock, it is part of human nature to immediately start paying more attention to the current price of the stock. Undeniably it is painful to purchase a stock, and watch it drop 10% over the next few days. Undeniably the investor feels a surge of confidence and pride when a stock happens to rise 10% a few days after the purchase. But these emotional ups and downs can be very detrimental to long term investing success. How can you prepare yourself to not be emotional?  First and foremost, be prepared for the ups and downs that you will likely encounter.  Before your purchase, imagine that the stock price drops right after your purchase. What will your plan of action be? For example, will you sell after a certain percentage decrease, or stick with the stock? Anticipation of possible future events will help you deal with these events when they become a reality.


In addition, if you have documented your reasons for originally making the transaction, you can review these reasons when the unexpected happens. This will help you evaluate your choices going forward.



Spend Time Doing Research


If you are not able or willing to commit to spending time each week on your investments, then you should not bother with individual stocks. In the case of stocks, halfway understanding what you are doing is much worse than not understanding at all (and therefore buying mutual funds).  You should be able to explain in detail to another person why you have chosen a particular stock for an investment. Try this out on your friends, by verbally explaining your rational. You may be surprised at the ‘irrational’ description that you provide!


Evaluate and Re-Evaluate every Opportunity the Same Way


Regardless of your investing strategy (Value, Growth, Buffett, CANSLIM, etc.), a consistent evaluation of each stock is required. By taking the time to evaluate each company, you allow yourself the opportunity to compare and contrast them. With so much information about a particular stock available for free on the internet you can easily perform this evaluation. The specific metrics that you use (price to earnings, price to sales, debt level, sales growth, etc.) can vary for each investor, but for one investor, the same metrics should be used on all stocks being considered.


Once an investment is made, your work is far from over! You must keep track of the events (earnings reports, mostly) that affect your investment. At least once per quarter, you should review each investment and see if your original reasons for buying are still valid. If they are not, then you should sell the stock.



Long Term View


Investors should ignore the fluctuations of the market.  Today, it’s quite simple to get quotes, news and other financial information from the internet. While this readily available information is definably helpful, the investor needs to watch out and not get caught up in the day-to-day market fluctuations. The financial press, like the general news media, sometimes over-hype stories, since it is in their interest to grab the readers and viewers attention. The market offers you the opportunity to sell at a particular price. You do not have to take advantage of this offer.


If a company continues to grow in earnings and sales, while debt remains stable or declining, you can ignore the day-to-day, month-to-month, and even year-to-year price gyrations that will be experienced.


Understand One Stock in Extreme Detail


Whatever your current favorite company is, you should understand its business like you are the owner (which, of course, you are!). By understanding how a company makes money, what its return on invested capital is, how it plans to grow, what the competitive threats are, you can evaluate it against other investing opportunities.  If you find an opportunity that is better, then spend your time learning about that company in as much detail as possible. Some of the tasks you must do as a ‘part owner’ of this business:

  1. Understand how the company makes money.
  2. Read all press releases the company makes.
  3. Read all the 10Q and 10Ks the company issues.
  4. Listen to the quarterly results calls broadcast on the internet.
  5. Follow the industry the company is in.
  6. Know the competitors of the company, and follow their quarter results.
  7. Use the product of the company if possible.



Tools for the Individual Investor


Checklist Investor at Checklist Investor is a PC software tool that helps the investor to document their investing ideas, research, predictions and transactions.  Included are expert Checklists that the investor can review before each transaction. The investor can also create Checklists based on their own investing criteria.


The SEC (Securities and Exchange Commission) at Companies are required to file quarterly and annual reports detailing their financial condition. These reports can (and should be) read by investors.


Yahoo Personal Finance at Yahoo provides a very good resource for getting news, quotes, analyst forecasts, and ratings for stocks. Investors should spend some time each week reading the news about their investments.


MSN Money at MSN is also a great source of news and financial data. The Stock Scouter rating can be used to evaluate stocks, and the pre-defined screens are useful.


About the Author


Patrick Sollee is the founder of Checklist Investor, software that helps the individual investor make better decisions. He has been an investor for over 20 years, and holds 12 U.S. patents.