A while back, I wrote about grit as a vital feature for investors. This led to some email exchanges with younger readers who are in earlier career stages than financial analysts and money managers.
In general, the discussions revolved around the skills that a successful analyst and investor should have. And while passion for the markets and heart are key traits, I believe others are more fundamental.
First, there are cognitive skills, that is, the ability to think analytically and logically. Investing is a numbers game that requires analysts to make sense of mountains of data at all levels, whether about the economy and markets as a whole or about individual stocks and bonds. Without good cognitive skills, an analyst does not have the foundation to succeed, in my opinion.
A study by David Gill and Victoria L. Prowse looked at people’s traits and abilities during childhood and how they influence success in different subjects in school, the kinds of jobs students end up in, and how much money they earn they win
It won’t surprise you that kids with high intelligence and strong cognitive skills were more likely to excel in math, science, and English classes than in arts, sports, and hands-on classes like shop. (Yes, these clichés are true, at least statistically.)
And that math and science training boosts their innate cognitive abilities and leads them to choose jobs that fit their talents. As young adults, people with these traits are more likely to advance into managerial and technical positions and into professions such as medicine, teaching, engineering, finance, and law. As a result, they also have higher lifetime earnings, as managerial and technical careers as well as professions tend to pay better.
Therefore, if you lack analytical and cognitive skills, you probably won’t succeed as an investor. But most of those who work in finance as analysts or money managers do have these traits. Which begs the question: What sets good investors apart from the average?
I think it comes down to two shots.
People who focus on individual stocks and bonds tend to do better when they are diligent. Analyzing a financial statement with all the footnotes and asking questions about earnings calls are not easy tasks. And the more meticulous the analysts are, the more likely they are to find the flaw in the management of the story they are trying to tell. Let’s face it, no CEO is ever going to tell investors that they think the company is about to go belly up or is otherwise faltering. It’s the job of investors and analysts to see if their knight in shining armor is really as shiny as it seems.
In the most extreme cases, diligent analysis, critical thinking and challenging management can uncover fraud. Take the Enron case 20 years ago. Most analysts were fooled by the company into believing that everything was great. However, some questioned the company’s accounting practices and use of special purpose vehicles (SPVs). This research led some to conclude that Enron was a fraud. These are the analysts you want to talk to because they add value and help you perform better. The rest of the package that just adds to the hype, you can safely ignore. They will not make you money as an investor.
Beyond these analysts, you have the generalist fund managers, strategists and asset allocators who don’t dig deep into the company’s financial statements. For these investors, due diligence is less important and less of a differentiator. You can literally outsource this trait to research analysts who cover individual stocks.
But those in this cohort need another trait, one that makes the difference between being average and staying ahead of the curve: creativity. And I don’t mean creativity in the sense of painting or performing in a group of fans. They’re fun hobbies, but the kind of creativity that sets you apart as an investor is the ability to see data and markets differently than everyone else and put the individual pieces of information together to form new ideas.
In particular, I mean being able to navigate a noisy and uncertain environment with the necessary flexibility and conviction. Howard Marks, CFA, said it best when he said, “You can’t do the same things everyone else is doing and expect to outperform.” Unfortunately, too many analysts, strategists and fund managers do what everyone else does. The amount of true creativity in the investment world is very low, in my experience. Most people are just tweaking existing investment approaches, adding a few extra parameters here and there. This is not creativity that gets you extra performance.
Extra performance is created by doing what others are not doing and truly setting yourself apart. What does this mean in practice? It’s impossible to say. There are so many different ways and I won’t tell you how I try to do it because that would take the edge off me. So, all you have to do is become a client of my company, read my notes and book some meetings with me. If you haven’t already.
But back in the studio, Gill and Prowse show the various benefits that being creative can have in life. Creative people are more likely to end up in the C-suite and high-paying technical positions. The effect of creativity is about a fifth stronger than that of cognitive skills, but it is a compound effect.
The message is clear: to succeed in investing, cognitive skills provide the foundation, but creativity gives you something extra that sets you apart.
For more information from Joachim Klement, CFA, don’t miss it 7 mistakes every investor makes (and how to avoid them)i Risk profile and toleranceand sign up for theirs Klement on investment comment
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All posts are the opinion of the author. Therefore, they should not be construed as investment advice, nor do the views expressed necessarily reflect the views of the CFA Institute or the author’s employer.
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Joachim Klement, CFA
