Every Good Investor Needs These Two Qualities

There’s one thing 2022 should have taught you…

Investing ain’t easy.

Pretty much everything went down. The traditional 60% stock / 40% bond portfolio had one of its worst years on record. Almost no inflation hedge worked. Almost no stock market hedge worked, either.

Last year was a real grind. That’s what bear markets do.

They make most investors go from feeling like geniuses (i.e. 2020-2021) to wanting to give up altogether (i.e. 2022).

The way to win in investing is to stay in the game.

That’s the only way to let the math of compounding work. The longer you invest, the higher the likelihood you’ll make money – potentially a lot of money.

But that’s hard when nothing seems to go your way. When all of your investments are down. When the market is telling you you’re wrong on every idea.

Legendary investor Howard Marks said: “Intellectual humility means the other person could be right.”

The market is made up of millions of investors. You have to assume the collective wisdom of those millions have, or know, at least as much (if not more) information about the company than you do.

So having humility means you’re willing to accept that whatever initial investment thesis you had could be wrong.

It’s a quality which contradicts holding on for the long term, to let compounding do its thing.

Because it takes about 20-25 years to book a 100-bagger. And each company suffers multiple 25-50%+ drawdowns along the ride.

Thomas Phelps — who wrote a book about 100-baggers — said (emphasis added):

Patience is hard when you’re also supposed to have humility.

Because the market is right most of the time… meaning you could be wrong.

Humility is more important than patience, though.

As it plays a big part into how you can make money over the long term. Humility allows you to accept the fact that your theories could be totally wrong.

That’s why Warren Buffett has two rules to investing:

1. Don’t lose money.

2. Don’t forget about Rule #1

So the way to square patience and humility is through position sizing.

Proper position sizing is what allows you to sleep well at night. It lets you hold on during periods of uncertainty. Whether they’re company specific or macro. Whatever you need to do to not sell. Compounding won’t work otherwise.

As we discussed last week, 2023 is going to be another wild year.

There will be more volatility. But you need to hold onto your Trophy Assets in order to earn big gains (you can take a peek into a couple of our Trophy Asset holdings here and here).

That’s the no frills way to building significant wealth in the stock market. Patience and humility.

Humility is your real margin of error. Humility is what you need to last. Especially in this market.

If 2022 didn’t humble you… 2023 will.

Good investing,

Lance

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