Successful people form good habits.
Day in day out their actions are a reflection of effective processes that have been ingrained through hard work, discipline and education.
This is particularly true of professions that require high performance, such as elite athletes, military personal, leaders and investors.
The good news is these habits are nothing mystical. They can be taught and sometimes simply awareness of them can make a vast difference.
Join me on a wander down the path of the habits of investment success and see how you can change for the better.
Habit #1:Successful investors take responsibility.
The cornerstone of a effective approach to investing is responsibility. By taking responsibility for your own profits and losses, you gain control over your financial destiny.
It is easy to look for others to blame, be it your money manager, stockbroker or even the market itself. By accepting it is you who is the ultimate determining factor in your success, you gain the ability to work on yourself and improve the way you invest.
Habit #2: Successful investors have in-depth objectives.
They have clearly defined goals.
You should know the reason why you are investing. Perhaps you are looking for an early retirement on the beach (nice!) or would like to help a loved one live a better life (nicer!). These powerful motivations keep you from straying “off the beaten track” and help you invest with discipline.
Once you have uncovered your greater purpose, you can then define a returns goal/s (i.e. 20% a year) and a risk goal (i.e. I don’t want my account to be down more than 20%). Once you have these objectives, you then can develop a position-sizing model to help you meet them. More on that later.
Habit #3: Successful investors are prepared to take risks
Acceptance of risk is a challenge for many investors. They would (or course!) prefer that they could make money without ever having to lose any.
But losses are a fact of life in the markets. And accepting this is a positive thing. It frees you to create an investment plan that lets you move towards your goals.
I recently saw the power of this concept in action, at a nine-day training course with market wizard and world-renowned trading psychologist Van K. Tharp.
Tharp had recently shifted his tolerance for risk in his company retirement account. Previously his goal had never been to have a losing year. He then established a new rule that allowed him to risk the chance of a 25% drawdown on the account, but only if the investment opportunity was A-grade.
By doing this, he was able to invest heavily in a silver stock that was trading for below the amount of cash it had in the bank, let alone the value of the silver it had in the ground. The stock quickly rose from $3 to $11 while he was heavily invested, giving him the best year he had ever had.
If he had not accepted the risk of a 25% drawdown on his account, he would have never been able to capitalise on the opportunity like he did.
Habit #4: Successful investors have an edge.
An edge is an advantage that over time will provide you with healthy profits from the market. All successful investors have established an edge over the markets.
Examples of edges that successful investors have include:
- Buying undervalued stocks
- Waiting for a certain chart pattern to occur
- Following an investment strategy like William O’Neil’s CANSLIM
- Getting investment advice from someone with an edge.
Habit #5: Successful investors have powerful beliefs.
A. “It’s easy to make money if I am well prepared”
B. “The markets are difficult and risky”
Which of these beliefs does the successful investor have?
It’s obvious that it’s A.
What is not so obvious is that the successful investor would have held that belief before they became successful.
Top investors make a habit of cultivating a powerful belief structure.
And they are prepared to pick and choose the most productive beliefs and wear them, even if they might not necessarily believe them when they first put them on.
By choosing the beliefs that will make you successful, you give yourself a framework that will allow you to prosper and grow. The very act of choosing the belief creates an attraction towards it becoming a reality.
Habit #6: Successful investors achieve their goals through position sizing…not stock picking.
Position sizing is the most important habit a successful investor can have. Bar none.
Position sizing is not “asset allocation” or some other financial mumbo jumbo. It is knowing exactly how much you are risking on each investment so that you can achieve your objectives.
It is based off the historical performance of your investing system for the current market type (see point 6).
For example, if you know that for every 10 stock trades you place in a bull market on average you will have eight winners that will be twice as big as losers, then you can risk more than if you have only four winners out of every 10 trades.
Successful investors know their goals and their expected performance, and decide how much to invest based on this understanding.
Habit #7: Successful investors identify the market type
Would you invest the same way in a bull market as a bear market?
Successful investors don’t. One of their core habits is market type identification.
They know what the current market type is and adjust their strategy appropriately. Furthermore, they are aware that the market type could change at any time and are well prepared for the shift.
Habit #8: Successful investors stalk the market
Successful investors are hunters.
Using a well-cultivated habit of patience, they stalk their investments before placing them.
Once you have an idea for an investment it can be prudent not to enter a trade immediately. It’s best to wait to place trades under ideal conditions. Wait for the right set-up to occur and then zoom in on the price charts to look for an entry with an even better risk to reward (see point 13 for more on risk/reward).
Habit #9: Successful investors have simple entries
Take a successful investor and an amateur investor.
One is complex.
The other is simple.
But perhaps not in the way you might think.
The successful investor has the habit of simplification, particularly around when to buy. They know that the entry is not as important to their results as how much they trade or how they manage the trade once they have entered (exits).
Amateur investors tend to overcomplicate and overvalue the buy signal, when their real focus should be elsewhere.
Habit #10: Successful investors have complex exits
While they value simplicity, successful investors will have many reasons to exit from an investment.
For example, they may have:
- A initial stop-loss
- A profit objective when they enter the trade
- A trailing stop to protect profits while in the trade
- A risk/reward stop to ensure the trade makes sense
- A different trailing stop that comes into play if the market type changes.
These exits all serve to maximise profits and minimise the inevitable losses.
Habit #11: Successful investors let their profits run
An oldie but a goodie. One of the habits of successful investors is to let their profits run.
If you are in a good trade, don’t be tempted to take your profit quickly. Use a method that protects your gains, and at the same time allows you to capture big wins if the trade does go well for you.
Habit #12: Successful investors cut short their losses
The flipside of letting your profits run is cutting short your losses.
Successful investors see losses as a “cost of doing business” and are quick to realise any losses.
Amateurs will do anything to avoid taking a loss, including holding onto a big losing position.
If you do one thing when investing in stock, make sure you have a stop-loss and abide by it.
Habit #13: Successful investors understand risk/reward
A cardinal habit of the successful investor is checking the risk/reward of a trade before entering into a position. If it is not favourable, then they won’t place the trade.
You want to have a risk/reward of at least 2:1 on any individual trade. Your potential profit from the trade should be twice as big as your potential loss. This means that if you only get 50% of your investments correct, you would still come out a winner.
Habit #14: The more they lose the more money they make
I’m going to leave this section to the esteemed Dennis Gartman of the Gartman Letter, who sums this habit up perfectly with this story:
“I’m good at trading and I’m wrong alot according to my wife. When we got married, we sat down the first year and she said you know this is really very sad. You had a good year at trading. You made us a very nice living this year but Dennis you were wrong 53% of the time this year. I thought this was terribly harsh. You couldn’t even beat a coin toss. I got out of it by saying, Sweetheart I’m so in love with you that it’s colored my ability to think. She bought it. I got another year. We sat down the second year. She said, my wife the accountant, one plus two equals three. She said this is really very sad. You made more money trading this year then you made the previous year. But this year you were wrong 57% of the time. And people pay you for your ideas. And I’m standing by the notion last year that I told you. You can’t even beat a coin toss. You need to do better. Sweetheart I’m trying. Third year we sat down. My wife, the accountant, one plus two equals three. She said this is sad. You made more money than you made the previous two years. That’s lovely. I want to stay with you. But Dennis, you were wrong 68% of the time this year. Almost 7 out of 10 of your trades lost money. You have got to do better. I told her Laura I’m trying. I’m gonna try. Fourth year we sat down. My wife, the accountant, one plus two equals three. She said, you know, I get it now. You had the best year you ever had. Made more money this year then you made the previous three years. That’s lovely. This year you were wrong 81% of the time. I think if you can just be wrong 95% of the time. We’re gonna get stinkin’ rich. I think I can do it. I think I have it in my grasp to be wrong.”
Habit #15: Successful investors have a mental model of the market
Successful investors develop a story about the market and how it works.
They organise their thinking into a detailed set of beliefs about how the market works and have a routine in place to monitor its elements.
See this video by Ray Dalio, the world’s top hedge fund manager, who has made his mental model come to life.
Habit #16: Successful investors know that their mental model is often wrong
Successful investors trade what is in front of them.
Most likely, you will have several beliefs about how the market works (your mental model).There will be occasions where those beliefs don’t mesh with reality. Even if your belief is logically correct, the market may do something different.
If you hold too tightly onto that belief, then you may not see the market for what it truly is and miss out on significant opportunities or hold onto a losing position for too long.
Have a “grain of salt” about your mental model as the real world won’t always match up.
Habit #17: Successful investors treat investing as a business
Successful investors manage their investments like they would a business.
They have a carefully constructed business plan for their investing and follow a “rules-based” approach to selecting, entering and exiting positions.
A business plan is a formalisation of many (if not all) the habits in this article. It includes:
- Trading strategies
- Contingency plans.
Developing your plan should be a fun experience – and your plan should be enjoyable to read. You’re not in school or at work so make it lively and motivating!
Habit #18: Successful investors record their investments diligently
If I was to ask you “what percentage of successful investors record their trades?” what would you say?
If you said 100%, you would be the closest to being correct.
If I asked you “what percentage of amateur investors record their trades?” most likely the numbers would be reversed.
Now, what if I ask you “are you recording your trades?”
Successful investors have developed the habit of recording each trade they make. They know that without recording their results, they won’t know what is working and what is not, so they won’t know what to change to improve.
Habit #19: Successful investors review and monitor their investing systems
Successful investors will periodically review their investing strategies, as well as monitor their performance in real time.
If a strategy starts to deteriorate, they know about it and can stop trading or switch to a new strategy.
For example, if you were trading mining stocks and then the fundamental picture changed to be less favourable towards mining stocks, impacting your performance, you would know early on in the piece.
Habit #20: Successful investors do self-work
“An investment in knowledge pays the best interest” – Benjamin Franklin
Successful investors know that they are the most important factor in the profit equation.
Their success or failure is entirely dependent on their own skill and ability to execute, so they spend less time focusing on the market and more time on themselves.
To emulate their success, you want to cultivate a habit of self-improvement that allows you to consistently function at a high level.
Occasionally you will get your butt kicked by the markets. Self-work will give you a foundation of strength to remain persistent even in times of stress.
Habit #21: Successful investors prepare like an elite athlete before an event
Like an elite athlete, successful investors only place trades when they are in an optimal mindset. If their “headspace” is askew, then mistakes happen.
Similar to their athletic counterparts, these investors have a routine to ensure that investment decisions are made when they are in the zone.
This could include:
- Visualising and rehearsing prior to the event (trade)
- Meditating to calm the mind and boost creativity
- Regulating their emotions by using a technique such as feelings release
- Verbalising instead of internalising the investment decision to a colleague or loved one.
By freeing yourself of negative emotions such as fear or greed, you put yourself in a state from which you can make unencumbered and clear investment decisions.
Habit #22: Successful investors unify body and mind
There is a deep connection between the performance of the mind and the health of the body.
You may notice that when you feel an emotion you feel it in your body. You feel tense across the chest or nervous in the pit of your stomach.
By helping your body relax, you help the mind to relax too. Successful investors know this and make a conscious effort to maintain their physical health. It’s not at all uncommon for top investors to practice yoga or run marathons.
You don’t need to go to the extreme of running marathons; you could simply do some stretches and breathe before making any investment decisions.
Habit #23: Successful investors know when to stop
As tempting as it may be to stay continuously bonded to the market, successful investors know that sometimes they need to switch off and unplug.
- Have just suffered a loss that was large or traumatic
- Are feeling burnt out
- Are gambling instead of investing because you need some excitement
- Have loved ones that are not getting the attention they need.
Then it could be time to take a break. And be proactive about it. Plan breaks ahead of time, and plan to spend time with your family regularly. You have other areas of your life that need attention too.
Habit #24: Successful investors practise gratitude
Successful investors practise the formidable habit of gratitude.
If you have the ability to achieve your goals through investing, you are fortunate. It can be wise to be thankful and acknowledge the good things you have in life.
Gratitude is highly recommended for investors. And like the earlier habit of powerful beliefs, it is worth practicing before you achieve the success you are chasing.
Gratitude keeps you happy and helps you stay grounded. Overconfidence and arrogance are the market demons that gratitude keeps in check.
Habit #25: Successful investors understand investing is a game and that they make the rules
As an individual you invest in an unlimited environment.
No one is telling you what to do. No school teacher. No boss. No stock broker.
Successful investors know that they make the rules.
Yes. There is a framework – a matrix – which you operate in, but within that you are free to choose how you play the game of investing. So why not choose rules that advantage you?
Effective traders are disciplined. Some investors use technical analysis, others follow the fundamentals. No approach works all the time except discipline, which is essential regardless of how one invests. When it comes to stop-loss orders, for example, it’s not that a 15% stop is that much better than 12%, only that some discipline is set and adhered to over time. It only takes one slip-up to crater an otherwise healthy portfolio.
Research and Practice
Successful traders are continually practicing and refining their trading psychology. Back-testing and paper-trading are the flight simulators of trading. They let you build, test, and re-test, whatever your trading approach may be. Logging time with simulated trades will help condition you to remain consistent when the market may not be. Successful traders make or lose money by design—not by accident.
Balancing Risk Rather than Chasing Profit
Successful traders are good managers of their money and the risks of the market. Those same markets have a way of punishing those that aren’t. Seasoned traders establish their exit point as well as their target profit point before entering a trade. Good traders make sure that their risk in any trade, or group of trades, will not derail them financially or psychologically. People only lose the farm if they bet it in the first place. A reasonable trade plan should include a balance of risk and reward. Establish reasonable expectations for a targeted rate of return. Learn to distinguish between successful trading and luck.
Plan the Trade and Trade the Plan
Following established rules may help you survive and thrive in the market. No set of rules works every time, but they are the compass that helps you navigate the market’s stormy weather. It is important to plan each step of each trade and then actually execute the plan. People who trade without specific rules and a clear plan, or those that have rules and plans they don’t really follow, are at the market’s mercy. Good traders follow their rules and trade their plan.
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Approach Trading Methodically
Many successful traders use checklists as a tool to help them validate that they are thinking through their trading decisions, rather than reacting impulsively to market fluctuations. A best-selling book titled The Checklist Manifesto, by Atul Gawande, supports this idea. Based on research conducted primarily in hospitals, its central finding was that failure is more closely a result of ineptitude (not properly applying what we know works) vs. ignorance (not knowing enough about what works).
We’ve talked about the importance of a plan. Once a plan is in place and has been tested, it needs to be followed. When evaluating your plan, look for the following three characteristics.
Consistency—Is what you’re about to do consistent with your trade plan? Consistency is critical because it helps us track and potentially improve performance. How can you isolate what’s not working if each trade has its own set of rules? Consistency gives you a much better chance to replicate what is working and to adjust what isn’t.
Efficiency—Are you filtering and managing data in an efficient way? Are you maximizing the tools available? Limited time exists to filter market information and there are thousands of possible opportunities. It is important to find rules and tools that will help you reduce the market to a manageable size and identify opportunities.
Objectivity—Are you staying true to your plan? Let your process dictate your actions. Without this direction, emotion may begin to influence your decisions.
Trade with the Trend
Many traders follow a trend that is already in place and ride the wave as far as they can. This, in and of itself, influences the market. Others work hard to predict the beginning of the next big trend or try to pick the top or the bottom of the market. Sometimes going with the crowd makes sense. Following an established trend, while carefully managing downside risk, is favored by many well-known traders. An old adage of floor traders is, “The trend is your friend.”
The bottom line
These are just a few habits embraced by seasoned traders. It is important to remember that many ‘good habits’ are simple enough to understand, but not necessarily easy to always practice. Over time, you may develop other habits that support your trading strategy. You may wish to write them all down and even keep them in a visible place.
Successful trading is not so much about what you thought or how you felt, but what you actually did that makes the difference. Market sage Warren Buffet famously said, “The chains of habit are too light to be felt until they are too heavy to be broken.”