So you want to be a great investor. Since anyone can get lucky in the stock market in the short term, it takes a long track record of beating the market to prove one's greatness.
As it turns out, that's exceptionally hard to do. A 2015 study by S&P Dow Jones Indices found that more than 82 percent of actively managed mutual funds failed to beat the market over a 10-year period. Remember: these mutual funds are run by top-tier financial professionals who've dedicated much of their lives to outperforming indexes.
So, how do you beat the market? As with anything in life, your success as an investor is dependent on a mix of nature and nurture -- your genetic disposition and your acquired skills.
But given so many trained investment professionals fail to even match the returns of someone who bought the Standard & Poor's 500 index and forgot about it, that implies something interesting: The qualities of great investors might not actually be teachable.
You may have to be born to beat the market.
But before getting into the nature of great investors, let's take a look at the nurture required to leave the market behind in the dust.
Nurture. It's not particularly surprising that one's life experiences should play a role in creating great investors. Education, observation, industry experience and hard work are all examples of how nurture might mold the greatest performers in any field.
But according to some, that's just the tip of the iceberg.
Chris White, author of "Working with the Emotional Investor: Financial Psychology for Wealth Managers," says that when it comes to investing, "nurture is an incredibly central issue that goes back to our childhoods."
When growing up, "we all go through some experience of pain and loss and that seems to influence how we behave in settings where we have to make a decision regarding capital commitments," he says.
Consider the generation that grew up during the Great Depression -- a generation with a reputation for stinginess, an inclination toward conservative financial moves, and ultimately great anxiety in times of crisis.
"The difference between being a good investor and a great investor really involves how aware we are" of our childhood pains and how they affect our financial decisions, White says.
And that, thankfully, is something we can try to understand and improve upon.
Nature. While there's no doubt nurture has an essential role to play in creating the greatest investors of all time, nature, or one's DNA, arguably plays an even greater role. That's because unlike studying finance, reading annual reports or becoming more aware of our emotional makeup to improve as an investor, you can't change your DNA to help you improve your financial decisions.
Bob Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania, identifies five qualities that the best investors all have: patience, discipline, consistency, skepticism and confidence.
"Successful investors tend to be very patient. Wealth accumulation is a marathon and not a series of short sprints," Johnson says.
The idea of patience as financial virtue is borne out perfectly in Warren Buffett, the legendary investor and CEO of Berkshire Hathaway (ticker: BRK.A, BRK.B), who has said his favorite time horizon to own a stock is "forever." Very few investors are emotionally equipped to ride things out for that long.
The next of Johnson's qualities is discipline.
"One must adopt an investment discipline -- say value investing or growth investing -- and stick to it. People who switch back and forth between underlying disciplines tend to get caught in-between and underperform," Johnson says.
For individual investors, Johnson sees consistency as the willingness to make regular investments and not try to time the market. Always be investing and over time and you'll be glad you did.
David Twibell, president of Custom Portfolio Group, independently identified Johnson's last two criteria, skepticism and confidence, as innate qualities in great investors as well.
Most good investors are skeptics at heart, he says. "They generally don't accept things at face value and often pick apart generally accepted ideas looking for inconsistencies or alternative explanations. This allows them to embrace unique investment ideas, often long before others recognize them," Twibell says.
Confidence gives investors the ability to not just find unique investment ideas, but "act on them even when they aren't popular. They don't necessarily mind being alone in their views," Twibell says.
Blind confidence, however, can be crippling.
"They also have the humility to admit when they're wrong and change course," Twibell says. "Good investors understand they'll be wrong on occasion and refuse to let pride dissuade them from acting quickly to cut losses and move on."
That's quite a slate of prerequisites to being a truly great investor, and when taken at face value, it disqualifies the vast majority of the population -- even MBAs and those who've devoted their lives to Wall Street.
"While some people can develop these qualities, I think most would agree that many are predisposed to having more or less of these qualities via nature," Johnson says.
An incredibly high bar. There's good news and bad news from this examination of how nature and nurture create great investors.
The bad news is: You likely won't ever be able to beat the market long term. Even the vast majority of pros can't do it: Vanguard found that just 21 percent of actively managed funds beat the market in the 15-year period between the beginning of 2001 and the end of 2015. Statistically speaking, that number should be 50 percent.
Much of that dramatic difference in expected versus actual outcomes can be explained by the rare intestinal fortitude that's required -- which likely can't be taught -- to emotionally weather up and down markets without breaking a sweat.
Even if you have the aspects of nature and nurture that can make you a great investor, if Lady Luck deals you a bad hand at the right time, you can still underperform.
The good news, though, is that if you're content to simply earn market returns, you can.
And market returns, historically speaking, are impressive in and of themselves. A $10,000 investment in the market at the beginning of 1977 would be worth more than $222,000 at the beginning of 2017. That's nothing to scoff at.
So, before you decide you're determined to beat the market, look yourself over and ask this: Was I born to do this? If not, buying an index fund will have your portfolio beating about 80 percent of the pros.
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