Why You Can Be Good -- But Probably Not Great

Todd Sullivan often posts some great speeches or client letters from successful investors on his ValuePlays web site, and he recently featured a particularly interesting speech that former hedge fund star Mark Sellers gave to Harvard Business School students.

In the speech, Sellers tells these top students that they “have almost no chance of being a great investor”, the type who can compound money at 20%+ a year for the long run. “You have a really, really low probability, like [1 in 50] or less,” he says. “And the reason is that it doesn’t much matter 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 many people have and yet almost none of them end up compounding at 20% or 25% over their careers.”

To be a great investor, Sellers says, you “can’t compound money at 20% forever unless you have that hard-wired into you brain from the age of 10 or 11 or 12. I’m not sure if it’s nature or nurture, but by the time you’re a teenager, if you don’t already have it, you can’t get it.” Experience, education, and study won’t change that — though all of those things are necessary to become a great investor, Sellers says. “[But] in and of themselves [they] aren’t enough because all of them can be duplicated by competitors.”

Sellers says that to be a great investor, you essentially have to have something akin to the “economic moats” of which Warren Buffett speaks when analyzing companies — qualities that can’t be duplicated by competitors, no matter how hard they try. And no matter how hard you try, you probably can’t develop these traits once you’re an adult. “They have to do with psychology, and psychology is hard wired into your brain,” Sellers explains. “It’s a part of you. You can’t do much to change it even if you read a lot of books on the subject.”

Sellers says there are at least seven of these inherent traits that great investors share:

  1. The ability to buy stocks while others are panicking, and the ability to sell while others are euphoric;
  2. An obsessive desire to play the investing game and win (“They often have a hard time with personal relationships because, though they may truly enjoy other people, they don’t always give them much time,” Sellers says. “Their head is always in the clouds, dreaming about stocks.”);
  3. The willingness to learn from past mistakes;
  4. An inherent sense of risk based on common sense;
  5. Confidence in their own convictions and the ability to stick with them, even when facing criticism;
  6. The ability to use both halves of their brains — not just the mathematical part, but also the creative part. (“You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death,” he says. “And most important, I believe you need to be a good writer. … If you can’t write clearly, it is my opinion that you don’t think very clearly. And if you don’t think clearly, you’re in trouble.”);
  7. The ability to live through volatility without changing your investment thought process (Sellers says this is “the most important, and rarest, trait of all”);

For those not blessed with these traits, Sellers says there is good news: “A person can learn to be an above-average investor,” he says. “You can learn to do well enough, if you’re smart and hard working and educated, to keep a good, high-paying job in the investment business for your entire career. You can make millions without being a great investor. You can learn to outperform the averages by a couple points a year through hard work and an above-average IQ and a lot of study. … You can have a really successful, lucrative career even if you’re not the next Warren Buffett.”

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