Seven Traits of Exceptional Investors

Reflections #3

Welcome to this week's edition of Reflections. In this issue, we dive into the Seven Traits of Exceptional investors. Investing strategies are as diverse as the people who employ them, but certain timeless principles stand out. These traits, drawn from a 2007 lecture given to Harvard MBA students by investor Mark Sellers, remain crucial to success, offering lessons that hold true just as powerfully today as they did back then.

The Innate Edge

Sellers' speech, titled “So You Want To Be The Next Warren Buffett? How’s Your Writing?”, introduced the idea that certain critical traits can't be learned in adulthood. Instead, these traits are either part of a person’s nature or are cultivated early in life. As Sellers noted, "You can't learn these traits; you either have them, or you don't."

While we do somewhat agree with this perspective—some individuals may naturally possess an inclination for investing and others may not—we don’t fully agree with the idea that these all these traits are entirely unteachable. Many of the qualities that define a great investor can indeed be developed in adulthood through experience and dedication. Peter Lynch would likely agree:

“The natural-born investor is a myth.”

—Peter Lynch

We'd love to hear your thoughts on this: do you believe that great investors are born with innate abilities (if so, which ones?), or can these traits be developed through learning and experience?

Despite our critique, we still believe these traits are highly relevant and valuable insights for anyone aspiring to become an exceptional investor.

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Trait #1: Buying During Panic, Selling During Euphoria

The first trait Sellers emphasised is the ability to buy when others are panicking and to sell when others are euphoric. This requires a contrarian mindset, the courage to stand alone, and the conviction to act in opposition to the crowd. He pointed out that while many believe they can do this, the reality is far more challenging.

While the vast majority of people managing money have impressive qualifications—MBAs, high IQs, and extensive knowledge from reading numerous books—they often struggle when it comes to making tough decisions in real-time market conditions. Having knowledge and intelligence isn't enough; it requires a unique psychological resilience to act decisively when emotions and peer pressure are pulling you in the opposite direction.

"Be fearful when others are greedy, and greedy when others are fearful."

—Warren Buffett

Trait #2: An Obsession with the Game

Great investors aren't just participants in the market—they are deeply obsessed with the game of investing. Sellers highlighted that the best investors are those who are relentless in their pursuit of mastery, driven not merely by financial gain but by a deep-seated passion for the process itself. This deep-seated passion is what sets the truly great investors apart, driving them to continually push the boundaries of their knowledge and skills.

"The person that turns over the most rocks wins the game."

—Peter Lynch

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Trait #3: Learning from Mistakes

The third trait is a willingness to learn from past mistakes. Sellers pointed out that exceptional investors don’t just experience setbacks—they analyse them, extract lessons, and adjust their strategies accordingly. This willingness to face one’s errors head-on is far from easy. Most people would much rather brush off their past blunders and move on, preferring to forget the dumb decisions they've made.

However, it’s not just their own mistakes that great investors learn from—they also make it a point to study the mistakes of others. By observing the missteps of other investors, they can avoid falling into the same traps without having to experience the pain first hand. This trait underscores the importance of humility and a commitment to continuous improvement.

“It’s good to learn from your mistakes. It’s better to learn from other people’s mistakes.”

—Warren Buffett

Trait #4: A Deep Sense of Risk, Grounded in Common Sense

Understanding and managing risk is fundamental to investing, but exceptional investors possess an intuitive sense of risk that goes beyond quantitative analysis. Sellers argued that this sense of risk is grounded in common sense—a quality that is hard to teach.

Most people are familiar with the story of Long Term Capital Management, where a team of 60 or 70 PhDs, armed with sophisticated risk models, failed to recognize what, in retrospect, seemed obvious: they were dramatically over-leveraged. Despite their advanced models, they never stepped back to ask, “Even though the computer says this is okay, does it really make sense in real life?”

The greatest form of risk control is common sense, yet many investors fall into the trap of relying solely on complex models. They find comfort in the numbers and the assurances provided by the computer, allowing themselves to sleep well at night without questioning whether those calculations align with reality. Ignoring common sense is a mistake that is repeated often in the investment world, but it is avoided by exceptional investors.

“We continue to adhere to a common-sense view of risk - how much we can lose and the probability of losing it. While this perspective may seem over simplistic or even hopelessly outdated, we believe it provides a vital clarity about the true risks in investing.”

—Seth Klarman

Trait #5: Unwavering Conviction

The ability to maintain confidence in one's convictions, even when facing widespread criticism, is the fifth trait Sellers identified. This isn’t about being stubborn; it’s about having a well-founded investment thesis and the resolve to stick with it through thick and thin.

Conviction isn’t something innate—it’s something you build as you gain experience and improve as an investor. This links directly to the idea of a concentrated portfolio, where great investors show confidence in their best ideas by allocating significant portions of their capital to them. If you’re interested here’s a recent post we did on concentrated portfolios:

The Case for a Concentrated Portfolio

“The investor’s chief problem—and even his worst enemy—is likely to be himself.”

—Benjamin Graham

Trait #6: Balanced Cognitive Abilities

It’s crucial for an exceptional investor to engage both sides of the brain. In finance, the left-brain-dominant individuals often excel at calculations and logical analysis, but they may miss out on the qualitative insights and subtle cues that set truly great investors apart. The right-brain thinkers, who are typically less inclined towards math, are rarely found in finance, creating an imbalance. To be a great investor, both sides of the brain need to be fully engaged.

“Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.”

—Warren Buffett

Trait #7: The Ability to Endure Volatility

The final, and perhaps the most crucial, trait of all is the ability to navigate through market volatility without altering your investment strategy. This is an very rare quality, as most people find it nearly impossible to resist the urge to sell their stocks at a loss when the market is in a downturn. They also struggle to average down or invest more during declines, even when it could lead to better long-term outcomes.

Many investors equate short-term volatility with risk, which is a misguided notion. True risk is the permanent loss of capital. Short-term market swings aren't losses unless you panic and sell at the bottom, locking in that loss. Unfortunately, for most, the instinct to panic overrides rational thinking during these times, preventing them from becoming exceptional investors.

“The stock market is a device for transferring money from the impatient to the patient."

—Warren Buffett

Conclusion

Whether innate or cultivated, these traits distinguish great investors from the rest. While some qualities may be more inherent, many can be developed through experience, discipline, and a commitment to continuous learning.

Investing isn't just about numbers; it's about mastering your psychology, embracing volatility, and having the conviction to stay the course. As you reflect on these traits, consider which ones resonate with you and how you might cultivate them in your own investment journey.

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Disclaimer: The content provided in this newsletter is for informational purposes only and does not constitute financial, investment, or other professional advice. The opinions expressed here are those of the author and do not necessarily reflect the views of Schwar Capital. Investing involves risk, including the possible loss of principal. Past performance is not indicative of future results. The author may or may not hold positions in the stocks or other financial instruments mentioned. Always do your own research or consult with a qualified financial advisor before making any investment decisions.