Psychology Of Great Investors

I saw a speech last week by a guy named Mark Sellers, the principal and founder of a small hedge fund called Sellers Capital. While the guy may not be a "household name" he was an impressive speaker and really stood out among the many great speakers I have seen in my time here at this institution.

What stood out in his talk were what he called "the most important personality traits of great investors" that he has observed in investors that he follows and studies.

He thinks that these are hard-wired...so if you don't have them, too bad. Not sure if I agree about that point, but here they are in no particular order from my notes:

1) The ability to buy stocks while others panic and sell when others are euphoric.

2) Being obsessive about playing the game and wanting to win. First thing they think about when they wake up is a stock or risk in the portfolio. They have a hard time in personal relationships...their head is always in the clouds.

3) Willingness to learn from mistakes. Intense desire to learn from mistakes to avoid repeating them.

4) Inherent sense of risk based on common sense. For instance, in Long-Term Capital a great investor would have stepped back and said "hey…we are over-levered". The greatest risk control is common sense, and people ignore common sense.

5) Confidence in their convictions and stick with them even when people criticize them. This is why he focuses on large concentrated bets.

6) Important to have both sides of your brain working. Need inventive ways to solve problems. The goal here is to use creativity to be an entrepreneurial investor. Of course you need to perform calculations and have a logical thesis, but you need to be able to step back. And most importantly – you must be a good writer. Almost always a fund blows up because of quants.

7) Ability to live through volatility without changing your thought process. It is hard to average down. Few investors can handle the volatility. People irrationally equate short term volatility with risk. Short term volatility is NOT a risk. Just don’t sell.