Some time ago, I wrote about grit as an important feature for investors. This has triggered some email exchanges with younger readers who are earlier in their careers than financial analysts and money managers.
In general, discussions revolve around the skills of a successful analyst and investor. And while passion and grit are key features of the market, I believe others are more basic.
First, there are cognitive skills, that is, the ability to think analytically and logically. Investment is a numbers game that requires analysts to understand the mountain of data at each level, whether it is about the economy as a whole or the market or individual stocks and bonds. Without good cognitive skills, an analyst has no basis for success in my view.
David Gill and Victoria L. A study by Pruss examines the characteristics and abilities of people in childhood and how they affect success in various subjects in school, examining what kind of jobs students eventually turn into and how much income they earn.
It should not surprise you that children with high intelligence and strong cognitive skills were more likely to be proficient in math, science and English classes than in practical classes such as arts, sports and shops. (Yes, these clichs are true, at least statistically.)
And this training in math and science combines their innate cognitive abilities and leads them to choose a job that suits their talents. As young adults, people with these characteristics are more likely to ascend to managerial and technical positions and occupations such as medicine, teaching, engineering, finance and law. As a result, in addition to managerial and technical careers, professions also earn more than their lifetime earnings from the tendency to pay better.
So if you lack analytical and cognitive skills, you will probably not succeed as an investor. But those who work in finance as an analyst or money manager have these characteristics. Which raises the question: which distinguishes good investors from the average?
I believe it comes down to two features.
Those who focus on individual stocks and bonds tend to do better if they are diligent. Working your way through a financial statement with all the footnotes and asking exploratory questions on earning calls is not an easy task. And the more subtle the analyst, the more likely he is to find errors in story management. Let’s face it, no CEO is going to tell investors that they think the company is going to go belly up or is otherwise floundering. The job of investors and analysts is to make their night in glossy armor look as shiny as they actually look.
In the most extreme cases, diligent analysis, critical thinking, and challenging management can expose fraud. Take the case of Enron 20 years ago. Most analysts believed by the firm that everything was great. Yet some have questioned the firm’s accounting practices and the use of special purpose vehicles (SPVs). This investigation led some to conclude that Enron was a fraud. You want to talk to these analysts because they add value and help you perform better. You can safely ignore the rest of the pack that just falls into the promotion. They will not make you money as an investor.
Outside of these analysts, you have general fund managers, strategists and asset allocators who don’t dive deeply into a company’s financial statements. For these investors, hard work is less important and a differentiator less. You can literally outsource that feature to research analysts who cover individual stocks.
But those in this team need another trait that makes all the difference between being average and staying ahead of the curve: creativity. And I don’t mean creativity in the sense of painting or acting in an amateur acting team. These are fun hobbies, but the kind of creativity that sets you apart as an investor is the ability to see data and markets differently from everyone else, and to combine different pieces of information to create innovative insights.
In particular, I mean being able to navigate in a noisy, uncertain environment with the necessary flexibility and conviction. Howard Marx, CFA, said it best when he said: “You can’t do the same thing as others and expect promising performances.” Unfortunately, many analysts, strategists and fund managers do what everyone else does. The amount of real creativity in the investment world is very low, in my experience. Most people are just tinkering with existing investment methods, adding a few additional parameters here and there. It’s not the creativity that gets you extra performance.
Extra performance is created by doing what others are not doing and truly isolating yourself. What does this mean in practice? It is impossible to say. There are so many different ways and I won’t tell you how I will try to do it because it will take my edge off. So, you just have to be a client of my company, read my notes and book some meetings with me. If you haven’t already.
But back in the study, Gill and Pruss show the unique advantages that being creative can have in life. Creative people are more likely to end up in C-suits and well-paid technical positions. The effect of creativity is about one-fifth stronger than cognitive skill, but it is a composite effect.
The message is clear: for investment success, cognitive skills provide the foundation, but creativity gives you something extra that sets you apart.
Joachim Klement, for more from CFA, don’t miss out 7 Mistakes Every Investor Makes (and How to Avoid Them), And Risk profiling and tolerance, And sign up for it Clement on Investing Comment
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All posts are the author’s opinion. As such, they should not be construed as investment advice, or the opinions expressed do not reflect the views of the CFA Institute or the author’s employer.
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