Traits of Successful Investors

Traits of Successful Investors

Traits of Successful Investors. What does it take to be a successful investor? If there was a magic formula, we would all follow it. Who doesn’t want to be the next Warren Buffett? He has demonstrated consistency in both beating the market over time and building wealth. Granted, his returns have not been that great over the past few years. But the law of large numbers now makes it hard for Buffett to generate outsize returns. In addition, his focus has been on buying entire companies. In any case, what traits have made him so successful as an investor? For that matter, what made Peter Lynch, Benjamin Graham, John Templeton, John Neff, John Bogle and others successful investors? There are some clear traits that made these investors very successful.

First Trait of Successful Investors – Temperament Is Important

I have written about temperament versus intellect before in context of investing. It is really about controlling your emotions and being patient. Temperament is the first trait of successful investors. Investing is complex and you learn rapidly that the stock market and returns are not something you can control. However, you can control your emotions and impulses particularly when it comes to investing. Warren Buffett has been quoted as saying that “The most important quality for an investor is temperament, not intellect… You need a temperament that neither derives great pleasure from being with the crowd or against the crowd.” 

It is sometimes difficult to not buy a stock when everyone else. But following the herd and the fear of missing out can lead to poor returns. If you don’t believe me look at those who invested in dotcom stocks in late 1999 or early 2000. In many cases, those companies ceased to exist or never returned to those market valuations. Even more mature companies can be risky from the perspective of total returns at sky high valuations. Ciscso (CSCO), a stock that I own, has not yet returned to its peak stock price set about 20 years ago. The same goes for Intel (INTC), Corning (GLW), Nokia (NOK), and many other dotcom and telecom darlings from that time.

The reverse is also true, can you avoid selling in a panic when the market is falling. We need only to go back about 1-year ago to find many stocks whose stock prices dropped like a rock. Even slow and steady dividend growth stock like Sysco (SYY) and Cincinnati Financial (CINF) had stock prices that dropped by more than half at the market bottom. But selling into a panic locks in your paper losses. On the other hand, can you go against the crowd and be contrarian and buy at this time. There are always decent opportunities during a correction or in a bear market.

Second Trait of Successful Investors – Knowledge and Learning

In my opinion a good part of investing is knowledge and learning, which are the second traits of successful investors. There are quantitative factors and qualitative factors that investors must learn and know. Quantitative factors include but are not limited to items like valuation ratios, growth and margin metrics, and dividend safety factors. Qualitative factors include but are not limited to items like management, business model, competition, and risk factors. Why are these important? You certainly don’t want to buy overvalued stocks and you should learn when a stock is overvalued. You should know if the dividend is at risk for a cut or suspension, especially if you are dividend growth investor or investing for income. Which metrics define dividend safety? Changes in management can act as a catalyst for the better or worse. For example, Microsoft (MSFT), which I am long, became a better company from the perspective of returns, strategy, and execution after a change in management.

Learning and knowledge that comes along with it will provide confidence in selecting stocks and dealing with mistakes that are bound to happen. No one is perfect and in investing being right 6 out of 10 times is pretty good. More experienced investors may be right 7 or 8 out of 10 times. You will make a poor investment decision at some point. The market has a way of deflating the most overconfident investor. Learning from a mistake and accepting the fact that it was your decision will make you better investor.

Third Trait of Successful Investors – Structure and Discipline

Structure and discipline are the third traits of successful investors. What do I mean by structure and discipline in this context? It means that you have a process that is well defined, and you are not just buying and selling stocks in a poorly thought-out process. Furthermore, investing should not be exciting. Too many investors end up with dozens of stocks and many do not fit their investment criteria, goals, or risk profile. If you have dozens or even more stocks, then you pretty much have created your own index fund.

Defining your goal is paramount to defining your investment strategy. Are you investing for income, high yield, dividend growth, capital gains, etc.? What are your investment criteria? Is it valuation, which can be defined in many ways? Are you seeking a specific yield?  What is your risk profile? Can you stomach high beta stocks? Is a concentrated portfolio one that makes sense for you? Or should you be more diversified?

You get the idea. A well-defined strategy with structure for your investment decisions and the discipline to follow it over an extended period time can possibly lead to a portfolio of stocks that fits your risk profile and provided more consistent returns.

Final Thoughts on Traits of Successful Investors

Investing is not a random activity. Your decisions have consequences down the road. You may pick a bad stock that performs poorly resulting in losses. On the other hand, you may pick a good stock that generates solid dividend growth and capital gains. You may also pick a 10 bagger or more. I think I outlined above three traits of successful investors for building wealth to the first $100,000 and beyond or even generational wealth. What are your thoughts on the matter?

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Chart or Table of the Week

Today I highlight Weyco Group (WEYS). The company is one of the smaller Dividend Champions with a market capitalization of only about $200 million. The relatively unknown company owns some well-known shoe brands including Florsheim, Nunn Bush, Stacy Adams, and BOGS. The founding family still controls the company with about 48% of common shares. Several members of the Florsheim family are in key management positions. Despite a steep downturn in sales during the COVID-19 pandemic the dividend was either cut nor suspended. The fortress balance sheet allowed Weyco to continue paying the dividend. Weyco is a Dividend Champion with 39 years of consecutive annual dividend growth. The current yield is roughly 4.6%. The screenshot below is from Stock Rover*.

Dividend Increases and Reinstatements

I have created a searchable list of dividend increases and reinstatements at the request of a reader. I update this list weekly. You can search for your stocks by company name, ticker, and date.

Dividend Cuts and Suspensions List

I updated my dividend cuts and suspensions list at end of April. The number of companies on the list has risen to 521. We are well over 10% of companies that pay dividends having cut or suspended them since the start of the COVID-19 pandemic.

There were three new companies to add to the list this past month. These three companies were Acadia Realty Trust (AKR), Genie Energy (GNE), and Tri-Continental (TY).

Two companies have made additional cuts or suspended the dividend outright. This includes Antero Midstream (AM) and Geo Group (GEO).

Market Indices

Dow Jones Industrial Averages (DJIA): 34,777 (+2.67%)

NASDAQ: 13,752 (-1.51%)

S&P 500: 4,232 (+1.23%)

Market Valuation

The S&P 500 is trading at a price-to-earnings ratio of 45.0X and the Schiller P/E Ratio is at about 37.8X. These two metrics are up this past week. Note that the long-term means of these two ratios are 15.9X and 16.8X, respectively. 

I continue to believe that the market is overvalued at this point. I personally view anything over 30X as overvalued based on historical data. Note that we are near or over 40X and valuation levels near the top of the dot-com era.

S&P 500 PE Ratio

Shiller PE Ratio

Stock Market Volatility – CBOE VIX

The CBOE VIX measuring volatility was down over two full points this past week to 16.69. The long-term average is approximately 19 to 20.

Fear & Greed Index

I also track the Fear & Greed Index. The index is now in Neutral at a value of 55. This is down 1 point this past week.

There are seven indicators in the index. They are Put and Call Options, Junk Bond Demand, Market Momentum, Market Volatility, Stock Price Strength, Stock Price Breadth, and Safe Haven Demand.

Junk Bond Demand is indicating Extreme Greed. Investors are accepting 1.97% yield over investment grade corporate bonds. The spread is down further from recent levels indicating that investors are taking on more risk.

Market Momentum is indicating Extreme Greed. The S&P 500 is 9.68% over its 125-day average. This is further above the average than normal over the past 2-years.

Stock Price Strength is signaling Extreme Greed. The number of stocks hitting 52-week highs compared to those hitting 52-week lows is at the upper end of its range.

Market Volatility is set at Neutral. The CBOE VIX reading of 16.69 is a neutral reading.

Stock Price Breadth is indicating Fear as advancing volume is 14.96% more than declining volume on the NYSE. Market breadth is improving but it is still near the lower end of its range.

Put and Call Options are signaling Extreme Fear. In the last five trading days, put option volume has lagged call option volume by 51.25%. This is amongst the highest level of put buying in the past two years.

Safe Haven Demand is in Extreme Fear. Stocks have outperformed bonds by 1.76% over the past 20 trading days. This is close to the weakest performance over the past 2-years as investors move back into bonds.

Economic News

Fed Chair Powell spoke at the “2021 Just Economy Conference”. The Fed Chair indicated that while the economy is not out of the woods, it has made significant progress. Powell particularly focused on the Fed’s annual Survey of Household Economic Decisionmaking (SHED) to be released later this month. The report will show that adults without a bachelor’s degree as well as Black and Hispanic workers were disproportionally affected by the pandemic. Some 20% of workers in the lowest one-fifth of workers by income did not have jobs in February as compared to 6% of workers in the highest one-fifth of incomes. SHED is also set to report that 80% of small businesses reported declining revenues.

The Department of Commerce reported that U.S. factory orders rose 1.1% in March after falling 0.5% in February.  Factory orders were supported by strong demand for machinery, motor vehicles, fabricated and primary metal products, while orders for electrical equipment, appliances, and components decreased. Orders rose 6.6% on a year-on-year basis. Durable goods orders increased 0.8%, up slightly over the initially reported increase of 0.5%. Orders for nondurable goods rose 1.5%.

The U.S. Bureau of Labor Statistics reported that the economy added 266,000 jobs in April, sharply lower than March’s downwardly revised 770,000 and February’s upwardly revised 536,000. The unemployment rate rose slightly to 6.1% in April, up from 6% a month earlier. April’s figures show the slowest improvement for jobs since January. Overall employment is still more than 8.2 million jobs short of the pre-pandemic level. Leisure and hospitality reported significant gains adding 331,000 jobs.  Employment in professional and business services reported significant losses dropping by 111,000. Manufacturing lost 18,000 workers, while employment for couriers and messengers dropped 77,000.

Thanks for reading Traits of Successful Investors – Week in Review!

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