Mark Seller is the founder of hedge fund Sellers Capital Fund and previously served as chief equity strategist at Morningstar.
This article is a speech he gave at Harvard University in 2008. Unlike most chicken soup-style speeches, Seller poured cold water on the students present right from the start, saying, "Only very few of you dare to aspire to become a great investor."
He believes that "if your competitors know your secret but cannot copy it, it is a structural advantage, a 'moat'."
So what is the competitive advantage that investors must have?
"They have to do with some psychological factors, and psychological factors are hardwired into your brain. They are part of you and you can't change them even if you read a lot of books on them."
In Seller's view, there are at least seven qualities that are common characteristics of great investors, which are real advantageous resources and can never be acquired once you become an adult.
Although Seller said that some of these traits cannot even be learned, their significance to us actually lies in understanding the extraordinary value of "mental barriers" in investment.
For example, buy stocks decisively when others are panicking, and sell stocks when others are blindly optimistic;
For example, during the investment process, one’s investment ideas remain unchanged despite major ups and downs.
In investment, we should also explore this potential. Maybe it is rooted in our genes. Who knows?
Below is the full text of this classic speech, shared by Smart Investor with everyone.
What I'm about to tell you is this: I'm not here to teach you how to be a great investor. Instead, I'm here to tell you why so few of you dare to aspire to be one.
If you spend enough time studying investing greats like Charlie Munger, Warren Buffett, Bruce Berkowitz, Bill Miller, Eddie Lampert, and Bill Ackman, you'll understand what I mean.
I know that everyone here has extraordinary intelligence and has worked hard to reach today's level. You are the smartest of the smart.
However, even if you don't listen to anything else I said today, you should at least remember one thing: you have almost no chance of becoming a great investor. You only have a very, very low probability, like 2%, or even less.
This takes into account the fact that you are all highly intelligent, hard-working individuals who will soon receive an MBA from one of the top business schools in the country.
If those present were just a random sample from a large population, the chances of becoming a great investor would be even smaller, say one in 5,000.
You will have more advantages than the average investor, but in the long run you have little chance of standing out from the crowd.
The reason is that it doesn't matter how high your IQ is, how many books, newspapers and magazines you have read, or how much experience you have or will have in your future career.
Lots of people have these qualities, but few achieve a 20% or 25% compound return over their careers.
I know some people will disagree with this, and I don't mean to offend anyone here. I'm not pointing at someone and saying, "You have almost no chance of becoming great."
There may be one or two people in this room who will achieve a 20% compound return over their careers, but it's hard to say in advance who that will be without knowing you.
On the bright side, while most of you won't achieve a 20% compound return over your career, you will still do better than the average investor because you have Harvard MBAs.
A person can learn how to be an above average investor. If you are smart, hardworking, and educated, you can do well enough to secure a good, high-paying job in the investment world. You can make millions without being a great investor.
Through a year of hard work, high intelligence, and diligent study, you can learn to surpass the average in a few areas.
So don't be discouraged by what I say today, even if you are not Buffett, you will have a really successful and well-paid career.
But you can't increase your wealth at a 20% compound rate forever unless you have certain qualities in your brain when you are eleven or twelve years old.
I'm not sure if it's innate or learned, but if you don't have it by the time you're a teenager, you never will.
You may or may not be able to outperform other investors until your brain is fully developed. Going to Harvard won't change that, nor will reading every book on investing, nor will years of experience. If you want to be a great investor, those are necessary, but not sufficient, qualities that can be copied by your competitors.
As an analogy, think of the various competitive strategies in the corporate world. I'm sure you've taken, or will take, a strategy course here.
You may study the articles and books of Michael Porter, which I studied on my own before entering business school. I have benefited greatly from his books and still use them all the time when analyzing companies.
Now, as the CEO of a company, what kind of advantages can protect you from fierce competition? How to find the right points to build a broad "economic moat" as Buffett calls it?
If technology is your only advantage, then it is not a resource for building a moat because it can and eventually will be copied.
In this case, your best hope is to be acquired or go public and sell all your shares before investors realize that you don't have a sustainable advantage.
Technology is one of those short-lived advantages. There are others, like a good management team, a stirring advertising campaign, or a viral trend. These things create advantages that are temporary, but they change over time and can be copied by competitors.
An "economic moat" is a structural advantage, like Southwest Airlines in the 1990s. It is deeply rooted in the company culture and every employee, and even if everyone knows more or less what Southwest Airlines does, no one else can copy it.
If your competitors know your secret but cannot copy it, that is a structural advantage, a "moat."
Where does your "moat" come from?
In my opinion, there are actually only four types of "economic moats" that are difficult to replicate and can last.
One is economies of scale, with Wal-Mart, Procter & Gamble, and Home Depot being examples.
Another resource is network effects, such as eBay, MasterCard, Visa, or American Express.
The third type is intellectual property, such as patents, trademarks, government licenses or customer loyalty. Disney, Nike and Genentech are good examples of this.
The last type is high user switching costs, which benefit payroll processing service company Paychex and Microsoft because it is very expensive for users to switch to other products.
Just as a company must either build a moat or endure mediocrity, an investor needs some advantage over his competitors or he will become mediocre.
There are more than 8,000 hedge funds and 10,000 mutual funds, and millions of individual investors try to play the stock market every day. How do you have an advantage over these people? Where does the "moat" come from?
First, reading a lot of books, magazines, and newspapers is not a resource for building a "moat". Anyone can read. Reading is certainly very important, but it will not give you a strong advantage over others, it can only keep you from falling behind.
People in the investment industry all have the habit of reading a lot, and some people read even more than others. However, I don’t think there is a positive correlation between investment performance and the amount of reading. Once your knowledge accumulation reaches a certain critical point, reading more will have a diminishing returns effect.
In fact, reading too much news can hurt your investment performance because it means you start to believe all the bullshit that journalists spew out to sell newspapers.
In addition, even if you have an MBA from a top school, or have a CFA qualification, a Ph.D., a CPA certificate, or dozens of other possible degrees and certificates, it is impossible for you to become a great investor. Harvard cannot teach you to be such a person, nor can Northwestern University, the University of Chicago, Wharton School of Business, or Stanford.
I would say that an MBA is the best way to learn how to accurately achieve the market average return. You can greatly reduce the number of mistakes you make along the way by doing an MBA. This will often earn you a good salary, even if you are further away from being a great investor.
You can’t buy or study your way to becoming a great investor. None of these things will build a moat for you, they just make it easier for you to get an invitation to the game.
Experience is another overrated thing. Experience is important, but it is not a resource for gaining competitive advantage. It is just another necessary ticket to the game. After a certain point, experience begins to have diminishing returns. If it were not so, then 60, 70, and 80 years old should be the golden age of all great money manipulators.
We all know that is not the case. So a certain level of experience is necessary to play this game, but at a certain point, it no longer helps. It is not an economic "moat" for investors.
Charlie Munger said that you can tell who "gets it" correctly, and sometimes that's someone with little to no investing experience.
So what is the competitive advantage that investors must have? Just like a company or an industry, the "moat" of investors should also be structural.
They are related to some psychological factors (note: this is what I often call mental barriers), and psychological factors are deeply rooted in your brain and are part of you. They cannot be changed even if you read a lot of related books.
There are 7 traits that great investors have in common
I believe that there are at least seven qualities that are common characteristics of great investors, which are real advantages and cannot be acquired once you become an adult.
In fact, some of these traits cannot even be learned; you must be born with them, and if you don’t have them, it will be difficult to find them in your lifetime.
The first trait is the ability to buy stocks decisively when others are panicking and sell stocks when others are blindly optimistic.
Everyone thought they could do it, but when October 19, 1987 came (the famous "Black Monday" in history), the market collapsed completely and almost no one had the courage to buy stocks again.
But in 1999 (the year before the Nasdaq crash), the market was going up almost every day, and you wouldn't allow yourself to sell your stocks because you were worried about falling behind others.
Most of the people who manage wealth have MBAs and high IQs and have read a lot of books. By the end of 1999, these people were also convinced that stocks were overvalued, but they could not allow themselves to withdraw their money from the gambling table, the reason is precisely what Buffett called "institutional coercion" (institutional imperative).
The second characteristic is that great investors are those who are extremely fascinated by the game and have a strong desire to win.
They don't just enjoy investing - investing is their life.
When they wake up in the morning, even if they are still half asleep, the first thing they think about is the stocks they have researched, or the stocks they are considering selling, or what is the biggest risk to their portfolio and how to avoid it.
They often get stuck in their personal lives and even though they may really like someone, they don't have much time to spend with them. Their heads are always in the clouds, dreaming about stocks.
Unfortunately, you can't learn this obsession with something, it's innate. If you don't have this obsession, you can't be the next Bruce Berkowitz (founder of Fairholme Funds, whose stock selection ideas are deeply influenced by Buffett, with a concentrated portfolio, low turnover rate, and few out-of-bounds).
The third trait is a strong desire to learn from past mistakes.
This is difficult for people to do, and it is this strong desire to learn from their past mistakes and avoid repeating them that makes great investors stand out. Most people will ignore the stupid decisions they made and move on.
The word I would use to describe them is repression. But if you ignore past mistakes instead of analyzing them thoroughly, there is no doubt that you will make similar mistakes in your future career. In fact, even if you do analyze them, it is difficult to avoid repeating the same mistakes.
The fourth trait is an innate sense of risk based on common sense.
Most people know the story of Long-Term Capital Management (one of the four largest international hedge funds in the mid-1990s, which was on the verge of bankruptcy in 1998 due to the Russian financial crisis). A team of sixty or seventy PhDs, with the most sophisticated risk analysis model, failed to discover the problem that seemed obvious in hindsight: they took too much risk.
They never stop to ask themselves, "Hey, even though the computer thinks this is possible, will it actually work in real life?" This ability may not be as common among humans as you think. I believe that the best risk control system is common sense, but people still listen to the computer's opinions and let themselves sleep peacefully. They ignore common sense, and I see this mistake repeated again and again in the investment world.
The fifth trait is that great investors have absolute confidence in their own ideas, even in the face of criticism.
Buffett resisted the dot-com frenzy even as people openly criticized him for ignoring technology stocks. When everyone else gave up on value investing, Buffett remained steadfast.
Barron's made him the cover character for this, with the headline "Warren, Where Did You Go Wrong?" Of course, in retrospect this further proved Buffett's wisdom, and Barron's became a perfect negative example.
Personally, I am amazed at how little confidence most investors have in the stocks they buy. According to the Kelly Formula, 20% of a portfolio can be placed in a single stock, but many investors only put 2%.
Mathematically speaking, using the Kelly formula, putting 2% of your investment in a stock is equivalent to betting that it has only a 51% chance of rising and a 49% chance of falling. Why waste your time making this bet?
These guys are paid $1 million a year just to find out which stocks have a 51% chance of going up? That's crazy.
The sixth trait is that both the left and right brains are used well, not just the left brain (which is good at math and organization).
I met a lot of very talented people in business school, but I was shocked by how many finance majors wrote shitty things and couldn't think creatively about problems.
Later I realized that some very smart people only think with half of their brain. This is enough to make you gain a foothold in the world, but it is far from enough if you want to become an innovative business investor who thinks differently from the mainstream.
On the other hand, if you are a right-brained person, you are likely to hate math and you are usually not going to be able to get into finance. So finance people are likely to be extremely left-brained, and I think that is a problem. I believe that a great investor uses both sides of the brain.
As an investor, you need to make calculations and have a logical and reasonable investment theory, which are all done by your left brain.
But you also need to do other things, like looking for subtle clues to judge the company's management team.
You need to calm down and draw a big picture of the current situation in your mind instead of analyzing it to death.
You need a sense of humor, humility and common sense.
And most importantly, I think you also have to be a good writer.
Look at Buffett. It is no coincidence that he is one of the best writers in the business world and also one of the best investors of all time.
If you can’t write clearly, I don’t think you can think clearly either. And if you can’t think clearly, you’re going to get into trouble.
Many people have genius-level IQs but cannot think clearly, even though they can calculate the price of a bond or option in their heads.
The last but most important, and also the rarest, quality is the ability to maintain investment thinking despite ups and downs during the investment process.
This is almost impossible for most people to do. When stocks start to fall, it is difficult for people to hold on to losses and not sell their stocks. When the market is falling, it is difficult for people to decide to buy more stocks to dilute the cost, or even to decide to put money back into stocks.
People don't like to endure temporary pain, even if it will lead to better benefits in the long run.
Few investors can handle the short-term volatility that is required to achieve high returns. They equate short-term volatility with risk. This is extremely irrational.
Risk means that if you bet on the wrong thing, you will lose money. And fluctuations in a relatively short period of time do not mean losses, so they are not risks, unless you panic when the market hits the bottom and are scared by the losses. But most people don't see things this way, their brains don't allow them to think this way.
Panic instincts will kick in and cut off the ability to think normally.
I must state that these traits cannot be learned once you reach adulthood. Your potential to become a great investor in the future has already been determined. This potential can be acquired through training, but it cannot be built from scratch because it is closely related to the structure of your brain and your childhood experiences.
This is not to say that financial education, reading, and investment experience are not important. These are important, but they only qualify you to enter the game and play it. Those are things that can be replicated by anyone, while the above 7 traits cannot.
As Buffett's teacher, Graham, a generation of investment master, also mentioned in the book "The Intelligent Investor" that the key to investment is the investor himself! I once described in a historical article: Smart people are good at finding their own problems!
(The crypto industry is highly volatile, this is just a sharing of opinions, not investment advice)