Years of experience have taught me that to be a successful active investor requires a very specific set of characteristics, and that many investors attempting to actively manage their portfolios today lack the emotional and personality traits necessary for success.
Investors with passive portfolios—assuming they are adequately and broadly diversified—face only one real point of failure: reacting emotionally to a market selloff and selling their holdings, often near a market bottom.
But investors who use actively managed strategies face two points of failure:
1. Reacting emotionally to a market selloff and liquidating their holdings, usually at the very worst time; and
2. Selling out of an active strategy that is doing worse than its benchmark, often over periods as little as three years.
The second point of failure occurs even if the investor has earned positive returns in the active strategy—let’s say a gain of 10% per year over the last three years versus a benchmark return of 12%. While all investors face the same point of failure when selling during market swoons, only active investors face the second pitfall. What’s more, research has shown that managers who are fired due to a three-year underperformance typically go on to outperform the manager with which the investor replaces them.
Obviously, this second point of failure can destroy long-term results, even if the general market has been performing well. Sadly, I have seen this type of behavior often, leading me to conclude that for many investors, active management will never work because they lack the emotional and philological traits required to succeed.
Now, let’s look at seven traits that I think are necessary to be a successful long-term active investor.
1. Successful Active Investors Have A Long-Term Perspective on Their Investments.
“Having, and sticking to a true long term perspective is the closest you can come to possessing an investing super power.”
~ Tweet from Cliff Asness, Co-Founder AQR Capital Management
Cliff is right, but, sadly, most investors lack this ability. Evolution has programmed us to pay far more attention to what is happening now than to what might happen in ten or twenty years. For our ancient ancestors, that made a great deal of sense. Those who reacted quickly to rustling in a nearby bush—assuming it was a predator who could kill them–ran away and survived, whereas those who didn’t were often killed. Guess whose genes got passed down to us? Of course it was those that ran, even if there was no fatal threat.
Our culture has evolved much more rapidly than our brains, which doesn’t help us keep a long-term perspective on our investments. When you time-weight short-term information for investment decisions, you create a reactionary model, not an anticipatory one.
Many behaviors that hobble making good investment choices seem to be encoded into our genes. In their paper Why do Individuals Exhibit Investment Biases?, researchers Henrik Cronqvist and Stephan Siegel write:
“We find that a long list of investment biases—e.g., the reluctance to realize losses, performance chasing, and the home bias—are human, in the sense that we are born with them. Genetic factors explain up to 45% of these variation in those biases across individuals. We find no evidence that education is a significant moderator of genetic investment behavior.”
Wow! It’s no wonder that the majority of investors succumb to short-term volatility in the market by selling and waiting until markets have been very strong to begin buying, even though more than 30 years of studies have proven this is exactly the wrong thing to do. It’s literally programmed into our genes and is impervious to education. We are also prone to a slew of cogitative biases, from overconfidence in our own abilities to our tendency to overweight things simply based upon how easily they are recalled. And knowing about our biases of judgment—something that has been noted in market research for more than 30 years—hardly eliminates them.
Successful active investing runs contrary to human nature. It’s encoded in our genes to overweight short-term events, to let emotions dictate decisions and to approach investing with no underlying cohesiveness or consistency. Successful active investors do not comply with nature; they defy it. The past, present and future make up their now. It’s not natural to watch others get caught up in spirals of greed and fear, causing booms and panics, and remain unmoved. It’s not natural to remain unemotional when short-term chaos threatens your nest egg. And, leading to my next required trait, it’s not natural to persevere in a rigorous, consistent manner—no matter what the market is doing.
2. Successful Active Investors Value Process over Outcome.
“If you can’t describe what you are doing as a process, you don’t know what you’re doing.”
~W. Edwards Deming
The vast majority of investors make investment choices based upon the past performance of a manager or investment strategy. So much so that SEC Rule 156 requires all money managers to include the disclosure that “past performance is not indicative of future results.” It’s ubiquitous–and routinely ignored by both managers and their clients. In keeping with human nature, we just can’t help ourselves when confronted with great or lousy recent performance. “What’s his/her track record?” is probably investors’ most frequently asked question when considering a fund or investment strategy. And, as mentioned above, the vast majority of investors are most concerned with how an investment did over the last one- or three-year period.
Yet successful active investors go further and ask “what’s his or her process in making investment decisions?” Outcomes are important, but it’s much more important to study and understand the underlying process that led to the outcome, be it good or bad. If you only focus on outcomes, you have no idea if the process that generated it is superior or inferior. This leads to performance chasing and relying far too much on recent outcomes to be of any practical use. Indeed, shorter-term performance can be positively misleading.
Look at a simple and intuitive strategy of buying the 50 stocks with the best annual sales gains. Consider this not in the abstract, but in the context of what had happened in the previous five years:
Year Annual Return S&P 500 return
Year one 7.90% 16.48%
Year two 32.20% 12.45%
Year three -5.95% -10.06%
Year four 107.37% �� 23.98%
Year five 20.37% 11.06%
Return 27.34% 10.16%
$10,000 invested in the strategy grew to $33,482, dwarfing the same investment in the S&P 500, which grew to $16,220. The three-year return (which is the metric that almost all investors look at when deciding if they want to invest or not) was even more compelling, with the strategy returning an average annual return of 32.90% compared to just 7.39% for the S&P 500.
Also consider that these returns would not appear in a vacuum—if it was a mutual fund it would probably have a five star Morningstar rating, it would likely be featured in business news stories quite favorably and the long-term “proof” of the last five years would say that this intuitive strategy made a great deal of sense and therefore attract a lot of investors.
Here’s the catch—the returns are for the period from 1964 through 1968, when, much like the late 1990s, speculative stocks soared. Investors without access to the historical results for this investment strategy would not have the perspective that the long term outlook reveals, and thus might have been tempted to invest in this strategy right before it went on to crash and burn. As the data from What Works on Wall Street make plain, over the very long term, this is a horrible strategy that returns less than U.S. T-bills over the long-term.
Had an investor had access to long-term returns, he or she would have seen that buying stocks based just on their annual growth of sales was a horrible way to invest—the strategy returned just 3.88 percent per year between 1964 and 2009! $10,000 invested in the 50 stocks from All Stocks with the best annual sales growth grew to just $57,631 at the end of 2009, whereas the same $10,000 invested in U.S. T-Bills compounded at 5.57 percent per year, turning $10,0000 into $120,778. In contrast, if the investor had simply put the money in an index like the S&P 500, the $10,000 would have earned 9.46 percent per year, with the $10,000 growing to $639,144! What the investor would have missed during the phase of exciting performance for this strategy is that valuation matters, and it matters a lot. What investors missed was that these types of stocks usually are very expensive, and very expensive stocks rarely make good on the promise of their sky-high valuations.
Thus, when evaluating an underlying process, it’s important to decide if it makes sense. The best way to do that is to look at how the process has fared over long periods of time. This allows you to better estimate whether the short-term results are due to luck or skill. We like to look at strategies rolling base rates—this creates a “movie” as opposed to a “snapshot” of how strategies perform in a variety of market environments.
Lest you think you can only do this with quantitative strategies that can be back tested, consider Warren Buffett’s results at Berkshire Hathaway. If you were making a choice about whether to invest in Berkshire stock using short-term results at the end of 1999, you probably would have passed, as over the previous three years, it underperformed the S&P 500 by 7.6% per year, and over the previous five years, by 3.76% per year. Indeed, your decision would have been reinforced by the news stories circulating that Buffett’s simple process no longer worked in the tech-dominated “new normal” for the stock market.
But if you checked on Buffett’s process, you would find that nothing had changed and that he still followed the stringent criteria he always had, generally looking for stocks with:
1. Recognizable brands with a wide moat;
2. Simple, easy to understand products and services;
3. Consistent, solid earnings over a long time period;
4. Low and manageable debt, and
5. Good ROE and other solid ratios.
These seem like sensible ways to buy stocks, and Buffett showed no signs of deviating from the strategy—he was (and is) patient and persistent, sticking with a proven strategy even when it isn’t working in the short-term. Now take a look at Buffett’s base rates from 1977 through 2016, Using Berkshire Class A stock:
These base rates are very similar to investing in the 10% of stocks that are cheapest based upon our value composite 1 from What Works on Wall Street, which ranks stocks on:
4. EBITDA-to-enterprise value; and
5. Price-to-cash flow.
This process always focuses on the cheapest stocks in the universe and makes a great deal of intuitive sense, which is backed up by the process and its performance over time.
3. Successful Active Investors Generally Ignore Forecasts and Predictions.
“I don’t let people do projections for me because I don’t like throwing up on the desk.”
“I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be.”
You can’t turn on business TV or read all of the various business news outlets or even talk with other investors without being bombarded with both short- and long-term forecasts and predictions. Against all the evidence, forecasts and predictions about what might happen in the future are intuitively attractive to us, since we are desperate to have a narrative about how the future might unfold. As I mentioned above, we tend to extrapolate what has happened recently well into the future, which almost never works. We’ll explore the results of this in a minute, but for now, consider that since we literally hear or read so many forecasts about markets, stocks, commodity prices, etc. that to follow up on the efficacy of each would be a full-time job. Lucky for us, others have done this job for us, and the results are grim. In a post at his website The Investor’s Field Guide, my son and fellow OSAM portfolio manager, Patrick O’Shaughnessy, highlighted a study that showed:
“The CXO Advisory group gathered 6,582 (investment) predictions from 68 different investing gurus made between 1998 and 2012, and tracked the results of those predictions. There were some very well-known names in the sample, but the average guru accuracy was just 47%–worse than a coin toss. Of the 68 gurus, 42 had accuracy scores below 50%.”
In his book Contrarian Investment Strategies: The Psychological Edge, money manager and author David Dreman looked at the accuracy of analysts’ and economists’ earnings growth estimates for the S&P 500 between 1988 and 2006. Dreman found that the average annual percentage error was 81% for analysts and 53% for economists! In other words, you might as well have bet on a monkey flipping coins.
People tend to take recent events and forecast similar returns into the future. Dreman nicely captures the results by looking at large international conferences of institutional investors where hundreds of delegates were polled about what stocks they thought would do well in the next year. Starting in 1968 and continuing through 1999, Dreman found that the stocks mentioned as favorites and expected to perform well tended to significantly underperform the market, and in many instances the stocks selected ended up in the stock market’s rogue’s gallery—for example, the top pick in 1999 was Enron, and we all know what happened there: one of the largest bankruptcies in corporate history. Least it seem like he was cherry-picking, Dreman looked at 52 surveys of how the favorite stocks of large numbers of professional investors fared between 1929 and 1980, with 18 studies including five or more stocks that experts picked as their favorites. The results? The 18 portfolios underperformed the market on 16 occasions. As Dreman dryly notes: “This meant, in effect, that when a client received professional advice about those stocks, they would underperform the market almost nine times out of ten.”
If you think this is outdated, here are some more famously wrong forecasts, as well as the results of an August, 2000 Fortune Magazine article called “10 Stocks To Last The Decade: A few trends that will likely shape the next ten years. Here’s a buy-and-forget portfolio to capitalize on them.” The results? As of December 31st, 2016 the 10 (or 8, since Nortel and Enron went bankrupt) were down 27%, versus a gain for the S&P 500 of 116%.
Finally, many studies have shown that this is true in almost all forecasts, be they about stock prices, patients needing medical treatment, college admissions offices trying to pick who to admit–and virtually every other industry where professionals were making predictions and forecasts. For more on this, check out Chapter Two of my book, What Works on Wall Street.
4. Successful Active Investors are Patient and Persistent.
“Nothing in this world can take the place of persistence. Talent will not: nothing is more common than unsuccessful men with great talent. Genius will not: unrewarded genius is almost a proverb. Education will not: the world is full of educated derelicts. Persistence and determination alone are omnipotent.”
In addition to having a well thought out process, great active investors are patient and persistent. Warren Buffett, Ben Graham, Peter Lynch, John Neff and Joel Greenblatt are all great investors, and while they have very different ways of looking at the stock market, they all share a common disposition—they are patient and persistent. In 1999, numerous articles and TV features suggested that while Warren Buffett might have been great in the old economy, he was well past his prime and was out of step with the “new” market reality. Buffett’s response? He noted that nothing had changed and that he would stand pat with the process that had served him so well for so long.
The same could be said for every investor on this list. John Neff, a great value investor who helmed Vanguard’s Windsor fund and over his 31 year tenure beat the S&P 500 by 3.1% per year. In the early 1990’s, I remember the cover of Institutional Investor magazine showing a man inside an hourglass where the sand had nearly dropped through to the other side with the question: “Is value investing dead?” Neff, who favored stocks with low PE ratios and high dividend yields and good return on equity and who had therefore had been underperforming over the short-term, did the same as Buffett, he patiently stuck with his process focusing on cheap stocks with superior yields and high ROE. He went on to deliver great returns for his investors.
The point is clear: successful active investors are not simply defined by their process, as many have very different approaches and processes that they follow, but rather by their diligence and persistence in sticking with their strategies even when they are underperforming their benchmarks. But all of these investors are also defined by the clarity of their process.
John P. Reese and Jack M. Forehand wrote a book called The Guru Investor: How To Beat The Market Using History’s Best Investment Strategies, in which they methodically create checklists investors can follow to emulate their favorite manager. Now, while their interpretation of the manager’s criteria is open to debate, they do a good job of creating checklists for the investors they attempt to duplicate, usually using either books or statements from the manager to generate their criteria. They also maintain a website, www.validea.com, detailing the performance and current stock picks from each of the manager’s they follow. For example, much like the list of criteria already covered for Buffett, here’s their process to emulate Ben Graham:
1. No technology companies, company must have high sales;
2. Current ratio of at least 2.0;
3. Long-term debt does not exceed net current assets;
4. Steady EPS growth over the past decade;
5. 3-year average PE is less than 15;
6. Price-to-book times PE is less than 22;
7. Continuous dividend payments.
According to their website, since 2003, applying these criteria to select stocks has returned a cumulative gain of 377%, outperforming the market by 248%! You can see how other managers performed at their website. Note, they subtly anchor you on the long-term by presenting the cumulative return over the last 13 years, thus reinforcing the idea that you should only judge active performance over very long periods of time.
Had you only been looking at the recent performance for the strategy, you would have been led to a very different conclusion—in 2014, the strategy lost 22.9% versus a gain of 11.4% for the S&P 500 and in 2015 it also lost 20.4% versus a slight loss of 0.7% for the S&P 500. Had you started using the strategy at the start of 2014, your account would show a cumulative loss of 39% at the end of 2015 versus a gain of 10.62% for the S&P 500–do you think you would have had the patience, persistence and emotional fortitude to stick with it? For the vast majority, the answer is no. For successful active investors, the answer is yes. Patience and persistence would have paid off in 2016, with a gain of 20% versus a gain of 9.5% for the S&P 500. More importantly, keeping the long-term track record in mind would have immensely helped an active manager or investor to stay the course.
5. Successful Active Investors Have a Strong Mental Attitude.
“Nothing can stop the man with the right mental attitude from achieving his goal; nothing on earth can help the man with the wrong mental attitude.”
Ben Graham believed that great investors are made, not born. It takes constant study, learning from both your own experience and that of others to create habits that lead to success. I believe that one of the habits that is not innate but learned is a strong mental attitude. I think that most successful active managers not only have strong mental attitudes, but many border on stoicism. Stoics taught that emotions resulted in errors of judgment and they thought that the best indication of someone’s philosophy was not what a person said, but how they behaved. In the words of Epictetus, “It’s not what happens to you, but how you react that matters.”
Successful active investors understand, as Napoleon Hill stated, “The only thing you control is your mind.” Practically, this means that you do not base your actions, feelings, emotions and thoughts on external events—good or bad—or on what other people are doing or saying, none of which are in your control, but rather on your own actions, beliefs and habits, all of which are in your control.
Successful active investors do not blame others or events; they do not shirk from their personal responsibility for how things turn out, but rather continually focus on their process and trying to improve it. They learn from every lesson, be it good or bad, and continually strive to incorporate that learning into their process. Above all, they understand that you must control your emotions rather than let them control you.
They understand, as Shakespeare famously said, “there is nothing either good or bad, but thinking makes it so.” Events very much depend upon how you interpret them. What might cause one person to react emotionally to something is treated as a learning experience by someone with a strong mental attitude. I think that this is a disposition that is learned and rarely innate. It is very helpful on the journey to becoming a successful active manager to keep a journal of how you reacted to various events and outcomes. This allows you to learn if there is a common thread that keeps you from succeeding. If so, you can then actively work to replace those behaviors.
By doing so, you reinforce the belief that the only one controlling your mind is you, which strengthens the synaptic connections in your brain that allow you to make this type of thinking more natural. Once accomplished, your thought patterns and mental attitudes become vastly more useful than reacting from base emotions such as fear, greed, envy and hope. Once habituated, this mindset frees you to persistently follow your process, even when it is not working in the short-term. Ralph Waldo Emerson said, “To map out a course of action and follow it to the end requires courage.” And, I would add, a strong mental attitude.
6. Successful Active Investors Think in Terms of Probabilities
“You don’t want to believe in luck, you want to believe in odds.”
We are deterministic thinkers living in a probabilistic world. We crave certainty about how things will unfold. This is precisely why we fall for predictions and forecasts. Yet, even in the most prosaic of circumstances, nothing in the stock market—or in life—is 100% certain. But many people confuse possibility with probability and the two are almost exact opposites. Think of Jim Carrey’s “Dumb and Dumber” character Lloyd Christmas reacting to the unobtainable Mary Swanson’s rejection of his romantic advances; she told him his chances were “like one out of a million” and he responded: “So you’re telling me there’s a chance. YEAH!” Poor Lloyd mistook possibility with probability. And didn’t understand that the probability of he and Mary hooking up was virtually zero.
If we focus on “possibilities” rather than “probabilities,” we are lost. Almost anything is possible, even when highly improbable. If we think only of possibilities, it would be hard getting out of bed in the morning. It’s possible that you will get hit by a bus, get accosted by a stranger, get killed by a crashing plane or, more brightly, win the lottery, despite the very low probability of any of these events occurring. Focusing on possibilities can lead us to a state of constant fear—thus our desire for orderly, known and “certain” information and actions.
Life doesn’t work that way. According to Richard Peterson’s Inside the Investor’s Brain, “When an outcome is possible but not probable, people tend to overestimate its chances of occurring. This is called the possibility effect…Emotions in uncertain or risky situations are more sensitive to the possibility rather than the probability of strong consequences, contributing to the overweighting of very small probabilities.”
The best real world example of people thinking in terms of possibilities rather than probabilities was during the financial crisis—people actually sold out of all their long-term investments and I know of at least two who put large sums of cash into their safety deposit boxes. They were most certainly thinking of possibilities rather than probabilities.
A study we conducted in 2009 looked at the 50 worst ten-year returns for the US market since 1871 and found that the ten-years ending February 2009 was the second worst in more than 100 years. But more importantly, we looked at what happened after those horrible periods, and found that the 50 returns over the next three to ten years were all positive. This led us to conclude that the probabilities were quite high for the market to do well in the ten years after February 2009.
To succeed, it’s best to know the probabilities of a certain outcome, and then act accordingly. Knowing the probabilities gives you a strong edge over people who don’t know them or choose to ignore them. If you, like legendary card player and investor Ed Thorp, can count cards in blackjack so that you know the probabilities of what the next card is likely to be, you have an enormous edge. The same holds true for any number of professions: life insurance companies use actuarial tables to predict the probability of someone dying; casinos use probabilities that allow the house to always win in the end and colleges and universities rely on educational tests to determine who gets a spot at their institution.
In the stock market, I believe the best way forward is to look at the long-term results for an investment strategy and how often—and by what magnitude—it beat its underlying benchmark. For example, the table below (from the 4th edition of What Works on Wall Street) illustrates the results of simply buying the 10% of large stocks with the highest shareholder yield (dividend yield plus net buy backs) between 1927 and 2009.
You can see that over all rolling 3-year periods, that group beats other large stocks 81% of the time by an average 3.24% per year. When you extend it to all rolling 10-year periods, the base rate increases to 97%. Now, if you think about this, the base rate offers us an 80% chance of winning over any three-year period, but it also informs us that we have a 20% chance of losing to the benchmark over any 3-year period.
But very few investors pay much attention to base rates, and study after study has shown that when you introduce any information in addition to the base rate, people usually ignore the base rate in favor of the often-useless anecdotal information. Even though the rational thing to do is bet with the base rate and accept that we will not always be right, we are forever rejecting the long-term evidence in favor of the short-term hunch, even though our probability of being correct plummets.
We also ignore probabilities when we enthusiastically buy a story stock that is incredibly expensive—the 3-year base rates for buying stocks with the highest PE ratios is just 20%, meaning you will lose in 8 of 10 of all rolling 3-year periods.
The bottom line? Knowing the past odds of how often and by what magnitude a strategy either outperforms or underperforms its benchmark gives you an incredible edge that many people ignore. Successful active investors know this and pay close attention to this information, thereby putting the probabilities on their side.
7. Successful Active Investors are Highly Disciplined
“Discipline is the bridge between goals and accomplishment.”
It is easy to say is that you are an unemotional, disciplined investor—right up until the market goes against you and you throw in the towel. Did you sell the majority of your equity holdings during the financial crisis? Did you enthusiastically buy tech stocks in 1999? Did you ever let a prediction or a forecast influence your dealings in the market? Do you blame events or other people for what happened with your investments? Did you ever ignore all of the evidence and probabilities and “take a flyer” on a stock or a fund? Did you ever invest in something because the majority of other investors were doing so? Did you ever abandon a well-tested and thought out investment strategy because it recently had been doing poorly? If you answered yes to several of these questions, congratulations, you are a normal human being, but you may lack the discipline required to succeed as an active investor.
Being highly disciplined is extremely difficult. It goes against almost every impulse we have baked into our genes. Sure, it’s easy to be disciplined when things are going your way. When you are significantly outperforming your benchmark, your mantra might be the song “The future’s so bright, I’ve got to wear shades.” Real discipline kicks in when things are going against you, sometimes significantly. When every week seems like a month, when you are filled with self-doubt and constantly questioning every single part of your investment process, when others express skepticism about your core beliefs, and even friends and colleagues begin to doubt you and your process, that’s when discipline is required.
And, boy, does your mantra change, perhaps to the song “Been down so damn long that it looks like up to me.” You know what it’s like to feel horrible about yourself and your ideas, and you suddenly really understand the opening of Shakespeare’s 29th sonnet “When, in disgrace with fortune and men’s eyes, I all alone beweep my outcast state, and trouble deaf heaven with my bootless cries, and look upon myself and curse my fate…” That’s when you really need discipline if you are to succeed.
And, like most things in life, that is precisely the moment when you want to shout: Stop! Every event and news item you see is the opposite of what you believe, and your emotions and intellect shout: Stop! And every single thing you read or hear people say remind you that you are wrong, that you must abandon your silly persistence and allow this pain to stop. Just let it stop. The emotional pain is so overwhelming that it feels like slow torture, day in and day out, and all you need do to make the pain go away is to abandon your silly process and allow yourself to breathe.
And if you continue to stick with it, even when every single thing conspires to dissuade you from your consistent application of your investment ideas and principles, you’ll also know that you may be wrong for a lot longer than you think you can endure. What’s worse, you won’t have to just put up with your interior fear, doubts and pain, you will often be derided, mocked, and ridiculed by many other people who think you’re simply a fool. All of the recent weight of the evidence will be on their side. Not only that, but experience teaches that they don’t come alone, they come in crowds. The criticism can be deafening, snide and cruel and this can be devastating to your psyche. According to a March 22, 2012 article in Psychology Today magazine listed “The (Only) 5 Fears we all Share”:
3. Loss of Autonomy;
4. Separation and
Each of these also plays a part in feeding your self-doubt and desire to abandon your discipline, but 3, 4 and 5 are the ones that are the cruelest in this instance because they feed everything you are feeling. Loss of autonomy is the feeling of “being controlled by circumstances beyond our control.” Separation is the feeling of “rejection, (and) not (being) respected or valued by anyone else.” And ego-death is “fear of humiliation, shame…or the shattering…of one’s constructed sense…of capability and worthiness.”
The only thing you can do is hang on to the idea that “this too, shall pass.” Not much of a lifeline, is it? I go on at length about this because I have been there more times than I care to remember. Indeed, absent discipline, all of the other six emotional and psychological traits that are pitfalls to successful active investing are worthless. And the question you must answer honestly is—in the throes of underperformance or rocky market conditions, do you really have the discipline to remain unemotional and stick to your plan? According to a recent post by Ben Carlson discussing Charlie Munger’s ability to withstand drawdowns, he wrote: “Many people simply weren’t born with the correct wiring to be so unemotional…The ability and willingness to take risk are not always equal for most investors. Charlie Munger is a one-of-kind. It’s good for investors to remind themselves of this when trying to emulate him. Very few can.”
I believe that if you possess these seven traits and can really enforce a disciplined commitment to them, over time, you can do significantly better than passively indexing your portfolio. But as Ben points out, very few can.
If you are one of the few, I think our current environment and the rush of investors into passive products will only increase your chance of doing much better than an index, but you must be brutally honest with yourself. Keep a detailed journal of all of your investments and note when you succeed and when you fail. Then work on your weak points until they are gone. If you can manage this, you will become a member of a shrinking, and yet potentially lucrative club, that of long-term, active investors.