As you know, equity shares, bonds and T-bills provide different levels of returns and have varied risks involved. Although investment in equity may be appropriate for one investor, another may not be inclined to accept the risk associated with it and may prefer to go in for bonds or some other instrument, or even hold cash. Letís discuss the attributes of a successful investor.
Always plan an exit strategy
A successful investor knows that there are always two sides to an investment. The future is unpredictable, so he prepares in advance for it. An average investor tries to predict the future of his investments, meaning which he counts his chicken before they hatch. A successful investor does the opposite; he prepares for the best while being ready for the worst. This is why he makes money when the market goes up, and even more when it comes down. A successful investor always has an exit strategy ready while entering an investment.
A successful investor exercises patience. When he makes calculations on an investment, he is prepared to wait to ensure the plan materialises. He takes advantage of short-term bull runs, but always has a back-up plan. He doesnít expect to make money overnight. Assuming a share gives an average return of 2% in a month and you hold it for a year, you would gets a return of 24% per annum. So, patience and perseverance are the main characteristics of a successful investor.
A successful investor knows that the stock market is driven by the prevailing sentiments. The market goes up and down due to two emotional factors ó fear and greed. An average investor invests based on these emotions, but a successful one has a stronger control over these emotions. He always has a neutral reaction to either winning or losing. He doesnít abandon his investing strategy simply because of a few failures, or become over-confident when he is on the winning side.
Targeted rate of return
A vast majority of successful investors have their own targeted or expected rate of return. Suppose you buy a share of ABC and expect it to return 30% in a span of a year. The moment ABC gives the expected return, you would sell that share, even if there are signs that the price might go up further. This is an important characteristic of a successful investor.
Sticking to your strategy, whether winning or losing, requires a great deal of persistence. An average investor lacks persistence and that is why he remains average forever. He normally jumps from one strategy to another and is always looking for the next hot tip.
Learn from past mistakes
A successful investor does make mistakes, but he learns from them. You can never become successful without making some miscalculation. An average investor would perceive mistakes as bad, but a successful one sees mistakes as an opportunity to learn something new.
Passion of investing
Be passionate about investing. An average investor is always after how much he is going to make now, but a successful one uses delayed gratification and compounding to gain an edge. A famous author once said if you are going to play a game, choose one that you can play throughout your lifetime with passion. Investing is one such game.
P Saravanan is associate professor of finance and accounting at IIM Shillong