I am asked many questions about investing, as you can imagine. But there is one very important question I am rarely asked. That question is: “What is the single most important attribute that it takes to beat the stock market?”. Fortunately I’m asking it and answering it myself. The answer is independent thinking. It’s more important than hard work, or expensive subscriptions, or sitting in front of your computer all day (don’t get me wrong however, all those things help). Independent thinking is the single most important attribute.
What do I mean by independent thinking? I don’t mean mere contrarianism, voting against the crowd, because very often the crowd is right. Last year for example, everyone said the markets would take off after the Iraq war was over, and that’s exactly what happened. And I don’t mean taking a particular stance on one investment and just sticking by it. The ‘gold bugs’ were wrong about gold for 20 years, before it finally did something. They are right now, but they lost so much money for so long they will probably never catch up. I mean taking in the facts about industries, the economy, the political and world situation and drawing your own conclusions. That means ignoring all preconceived ideas, including your own. One might think that moving all manufacturing to China is a dumb idea, but thinking that would have hardly made one money the last few years.
I read what I thought was a very funny article the other day about how to be your own investment advisor. It recommended comparing your picks to that of many analysts and choose one they agreed was a good stock. This would guarantee picking a stock that is: a) Already a very big company and b) Everyone has already bought big stakes in. With advice like that, no wonder it’s so tough to beat the averages.
Make no mistake, what I am suggesting isn’t easy. But in the long run that attribute will serve you well.