February 15, 2007 – There are 7 habits that highly effective investors engage in regularly that separate themselves from the thundering sheep herd. These 7 habits, in fact, often lead to highly effective investors acting very differently from the average investor not because he or she believes in contrarian investing, but because the highly effective investor utilizes information that the average investor does not consider in making his or her investment decisions. It is not the behavior that makes someone a highly effective investor, but it is the information a highly effective investor uncovers that makes his or her investing behavior drastically different.
These 7 habits are what drive the behavior of highly effective investors:
(1) Learn how to invest for yourself instead of handing your money to someone else to invest. Self-reliance is the best way to ensure that no one is selling you the highest fee or commission products or even worse, stealing from your account or incompetently managing your account (which is almost the same as stealing).
(2) Incorporate buy and sell rules that you do not waver from. In investing, unlike relationships, emotion and hope are both the enemy. Becoming enamored with an investment or a stock and refusing to sell out when you’ve made enormous gains or minimal losses increases the chances that the investment will turn from a good to bad one or from a bad to worse one. Hoping that an investment will recoup losses that are unforeseen is a dangerous game as opposed to having definite sell rules that you follow no matter how much you love a particular investment.
(3) Having a “rich” life is not just about making money. The most effective investors have an investment system that they have customized to their strengths and that they have spent time to learn so that investing does not consume their lives. Effective investors have loads of success in their investment lives yet still have enough leisure time to spend lots of time with their friends and families.
(4) Don’t enter investment opportunities you don’t fully understand because someone else, even a close friend, tells you that there is no “downside” with unlimited upside. Anytime you here the phrase “there is no downside”, it should immediately trigger a red flag. There is no such thing as an investment with no downside. Even U.S. government treasuries, though none have ever defaulted to this date, still have a slim risk of defaulting. In fact, in 2006, the ceiling on the national debt had to be raised to ensure that the U.S. government could continue servicing interest on treasuries. Always take the time to fully understand what you invest in.
(5) Take as much time to understand that volatility does not equal risk. Every truly successful investor has hit some homeruns in their lifetime. This required investing in assets that have some considerable volatility. At the end of the day, only your absolute returns matter. If this requires having to invest 15% of your portfolio in much more volatile assets than the rest of the 85% of your portfolio, and out of that 15% the chances are high that some will lose money but the chances are high that some will end up being enormous home runs, it is much better to invest this way than to invest 100% in assets that you expect to return 8% a year.
Effective investors take very calculated risks in assets that have high levels of volatility to earn returns that blow the average investor out of the water. Again, investing like this is not riskier than the guy that conservatively invests. In fact, the conservative investor is taking the greater risk, because he or she has a much higher probability of never getting rich. Effective investors ensure that not only do they understand this concept, but that they effectively apply it as well. The overwhelming majority of financial consultants employed by large global investment houses do not understand this concept. That is why habit #1, Learn to invest yourself, is so important.
(6) Employ the long tail of investment analysis and the long tail of investment strategies to vastly improve your returns. The flattening of the world and increased accessibility to top-notch financial, corporate, and political information has created a drastic shift in the most effective investment strategies. Just Google “Long tail of investment strategies” and the “Long tail of investment analysis” to find more information about this.
(7) No highly effective investor utilizes diversification to become wealthy. It simply can’t be done. Specialize, specialize, specialize. Become an expert in several asset classes and find the best investment opportunities in these asset classes. Join an investment club with other experts and leverage all the expert knowledge to find the best investment opportunities not in your country, but the best investment opportunities in the world.
[tags]7 habits of highly effective investors, investment education,wealth literacy, how to build wealth quickly[/tags]
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J.S. Kim is the founder and Managing Director of maalamalama, a comprehensive online investment course that uses novel, proprietary advanced wealth planning techniques and the long tail of investing to identify low-risk, high-reward investment opportunities that seek to yield 25% or greater annual returns.
