Sometimes people ask me, what makes a good investor?

I’ve had the opportunity to observe a handful of great investors over the years, and plenty of bad ones. It’s pretty clear why the good ones are good—they all have a few things in common.

The first is intelligence—they’re simply super-smart people. There is an observable correlation between intelligence and investing ability. But it is a somewhat weak correlation.

I know lots of smart people who are terrible investors, and I know some dumb people that are great investors. But yes, raw cognitive ability will be responsible for a lot of your investing success.

The household names in the hedge fund world are, without a doubt, very smart people. Some 160+ IQs in that bunch. Within that group, you want to look for performance that is repeatable—someone with a long, profitable track record with minimal risk and small drawdowns has vanquished the “luck vs. skill” argument.

So yes, they are all very smart people. But that is not all.

The second attribute of great investors is experience—they’ve simply been doing it longer than anyone else. A lot of people get into the money management business when they are young, and they haven’t seen a whole cycle yet, just one-half of one. And the up part of the cycle is considerably less instructive than the down part.

I have been doing this for 21 years—I started in the business in 1999, in the middle of the dot-com bubble (the first one). I have seen a lot in my career.

Here's a short list of things I’ve traded through: the housing bubble, the European debt crisis, the S&P debt downgrade, the flash crash, the cotton bubble, beans in the teens, rare earths, uranium, Ebola, the yuan devaluation, zero rates, negative rates, oil at 140, oil negative, COVID-19, Bitcoin, the Tesla squeeze, Volkswagen, the cannabis bubble, security stocks in 2003, Ford debt downgrade, SARS, 9/11, the Iraq War, Trump’s election, the CHF reval, Argentina (multiple times), Puerto Rico, Venezuelan bonds, and European banks. And even though I didn’t trade through the Asian Financial Crisis and LTCM, I was watching them closely in grad school.

The list goes on and on. A 100-year flood every year for 20 years. You’re on the wrong side of just one of these trades, you’re done.

Like I said, I’ve seen a lot of stuff.

And I remember. I remember how the market behaved in each of these events. And I remember what stocks did on a micro level, too—including the price action after payroll numbers and Fed meetings.

Experience counts for a lot, which is strange, because there aren’t too many people over 40 on trading floors (though there are more today). We still have an obsession with hiring young people—mostly because they have an enlarged appetite for risk. You get old; you get careful. Which is a pretty good argument for hiring old people.

And finally, the most important attribute of great investors is emotional fitness. This has to do with your psychological makeup.

A big part of it is humility—there is nothing more dangerous in this world than overconfidence. Yet we lavish attention on people who speak with certainty.

I find that the most confident forecasts are typically the most wrong. And the forecasts uttered nervously with numerous disclaimers and qualifications tend to be the most right.

Emotional fitness refers to how you manage risk. How do you handle losses, but more importantly, how do you handle winners?

How you handle winners is much more important than how you handle losers. It has to do with your psychological need to be right—most people would rather be right than make money, believe it or not. They fear embarrassment more than they fear financial losses. They don’t mind being wrong, as long as they have company. To them, there is nothing worse than being wrong and alone.

These are all psychological failings. Among them is an underlying, deep-seated fear of success.

Early in my career, I read all of the Market Wizards books. In those books, great investors frequently talked about how important it was to manage your emotions, to treat investing as an academic problem, rather than an epic struggle. They talked about how you shouldn’t get angry and you shouldn’t get upset.

At the time, I thought this was crap. But I was wrong. Ever since I got my heart rate down, my performance has improved dramatically.

I’m a slow learner. It’s taken me 20-plus years to learn this stuff. And I’m definitely not the sharpest pencil in the box, so the intelligence thing doesn’t come naturally to me.

One last thing that most great investors have in common: they all have money already. It’s hard to make money if you’re struggling to pay the mortgage. If you take risk, make sure you take risk from a position of “screw you.”

Jared Dillian

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