More than a decade ago, shortly before the crash of 2008, the manager of the Hedge Funds Mark Sellers of Sellers Capital gave a great speech to a group of Harvard MBA students entitled «So you want to be the next Warren Buffett? What does your writing look like?» Sellers pulled no punches when he talked about the difficulty of becoming a great investor who can earn returns at 20% compounded annually saying: «I know everyone in this room is extremely smart and has worked hard to get to where they are. They are the brightest of the bright. However, there is one thing you should remember from my talk: You have almost no chance of being a great investor. You have a very, very low chance, like 2% or less».
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Here is an extract from that speech:
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One thing I will tell you up front: I am not here to teach you how to be a great investor. On the contrary, I am here to tell you why very few of you can expect to achieve this status.
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If you spend enough time studying investors like Charlie Munger, Warren Buffett, Bill Miller, Eddie Lampert, Bill Ackman and others who have had similar success in the investment world, you will understand what I mean.
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I know that everyone in this room is extremely intelligent and has worked hard to get to where you are. You are the brightest of the bright. And yet, there is one thing you should remember if you remember nothing else from my talk: You have almost no chance of being a great investor. You have a very, very low chance, like 2% or less.
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And I'm pondering the fact that you all have high IQs and are hard workers and will soon have an MBA from one of the best business schools in the country. If this audience were a random sample of the general population, the probability of anyone here becoming a great investor later on would be even lower, like 1/50th of 1% or something. You all have a lot of advantages over Joe Investor (the everyday investor), yet you have almost no chance of standing out from the crowd in the long run.
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And the reason is that it doesn't matter much what your IQ is, or how many books or magazines or newspapers you have read, or how much experience you have, or will have later in your career. These are things that a lot of people have, and yet almost none of them end up making 20% or 25% in the course of their career.
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I know this is controversial and I don't want to offend anyone in the public. I'm not pointing to anyone in particular and saying: «You have almost no chance of making it big». There are probably one or two people in this room who will end up making money at 20% during their career, but it's impossible to know in advance who they will be without knowing each of you personally.
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On the bright side, although most of you will not be able to compound money at 20% for your entire career, many of you will turn out to be good, above-average investors, because you are a biased sample, Harvard MBAs. A person can learn to be an above average investor. He can learn to do well enough, if he is smart, hard-working and educated, to keep a good, well-paying job in the investment business throughout his career.
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You can make millions without being a great investor. You can learn to beat the averages by a couple of points a year through hard work and an above-average IQ and a lot of study. So there is no reason to be discouraged by what I am saying today. You can have a really successful and lucrative career even if you are not the next Warren Buffett.
But you can't accumulate money at 20% forever, unless you have it engraved in your brain from the age of 10, 11 or 12. I'm not sure if it's by nature or by education, but when you're a teenager, if you don't have it, you can't get it anymore. By the time your brain is developed, you either have the ability to run circles around other investors, or you don't.
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Going to Harvard or other high-level public and private universities will not change that and reading all the books that have been written about investing will not change that either. Neither will years of experience. All these things are necessary if you want to become a great investor, but in themselves are not enough because they can all be copied by competitors.
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7 traits of highly successful investors:
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In my view, there are at least seven traits that great investors share that are true competitive advantages because once a person reaches adulthood they can no longer be learned. In fact, some of these traits cannot be learned at all; you are either born with them or you don't have them.
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1. The ability to buy shares while others panic and sell shares while others are euphoric. Very easy to say but almost impossible to apply when the time comes when the world is sinking and there are a thousand reasons to think that this time it is different.
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2. The second character trait of a great investor is that he is obsessive. They get up in the morning and go to bed at night thinking about companies, share prices, economic and financial data, and they want to win and win.
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3. A third trait is the willingness to learn from past mistakes. There is little point in not doing so as it will not inoculate us from making the same or similar mistakes in the future.
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4. A fourth trait is an inherent sense of risk based on common sense. It is as simple as that. No matter what the computers and calculations of probability of success say. Common sense must never be abandoned, and it will become our best ally and protector from disaster.
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5. Great investors are confident in their own convictions and stick to them, even when faced with criticism. This is also easy to say but very difficult to do, when you see that everyone around you thinks just the opposite.
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6. It is important to have both sides of the brain working, not just the left (the one that is good at mathematics and organisation). This is why many great investors are also able to write very well. The right side of the brain is able to detect subtleties that are very important for investment success, such as the character or behaviour of managers, and not just the business figures that their teams publish.
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7. And finally, the most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process. This is almost impossible for most people; when the going gets tough, they have a hard time not selling their stocks at a loss. You have to distinguish between volatility and risk, and this is something that much of the industry - not just ordinary investors - confuse and condemns them to mediocrity at best (I recommend reading «Why do they call it Risk when they mean Volatility? The Fable of the 3 Neighbours«)
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I would argue that none of these traits can be learned once a person reaches adulthood. At that point, their potential to be an outstanding investor in the future is already determined. It can be honed, but it cannot be developed from scratch because it has to do mostly with the way your brain is wired and the experiences you have as a child. That doesn't mean that financial education and experience in reading and investing are not important. They are fundamental to getting into the game and staying in the game. But those things can be copied by anyone. The seven traits above cannot be.
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You can download the full speech here.