I recently read a group of articles on the Internet about the characteristics that make a up good investor. Although I didn't agree with all of the ones mentioned in these articles, I felt that many of them were true, and that they were worth discussing. So, based on these articles, I've come up with my own list of what I feel are the most important qualities in making a good investor. And as I was reading these articles I recognized that (at least in my own mind) many of these qualities are ones that are inherently part of Dividend Growth Investing (DGI), and that make dividend growth Investors so successful. So, In this article I would like to discuss what I feel are the essential characteristics of a good investor, and go over how they relate to DGI.
The articles I read can be found HERE, HERE, HERE and HERE.
1. Highly successful investors are proactive learners
Most of the DGIers I am familiar with, especially those on SA, read quite a bit about investing. I love learning about investing. I've read hundreds of books, on many topics, and, obviously, I read many articles on Seeking Alpha. I know there is always more to learn, and I am always looking for more information to make me a better investor. Most DGIers I'm familiar with have read about, and tried, many different styles of investing before they discovered/converted to DGI, so they are familiar with many different forms of investing. I have tried day trading, growth investing, value investing, index investing, options trading, etc. And although they all had their good points, it was when I started reading about DGI that it all clicked. Had I not been pro-active in searching for more information, and different/better ways of investing, I never would have found DGI. I recommend that every body out there keep reading, and keep learning, and eventually you will find the investing method which works best for you, whether it is DGI or something else.
2. They have a well-defined investing strategy, including an exit strategy.
I do best when I can plan things out and come up with rules on what to do and what not to do. Most DGIers that I know develop a plan that includes rules and guidelines for what and when to buy, how to manage the portfolio in terms of diversification and rebalancing, and when to sell. Some even write out a business plan to spell out exactly what they are going to do, when, and why. Of course many types of investors come up with plans, but many times the plans fall apart at the first big market correction. With DGI the dividends keep rolling in, quarter after quarter, year after year. And that makes it very easy to stick to the plan, even as the market is falling.
Everybody I know who is a DGIer not only has rules for what and when they will buy, but just as importantly they know exactly under what conditions they will sell. If any of my stocks cut their dividends I will get rid of them. It's a very simple but very effective plan. And it is just as important as deciding what I am going to buy. Investing involves not just knowing when to buy a stock, but also knowing when to sell.
3. They are patient
Successful investors need to be able to wait until their plan leads to success. They need to be able to wait through some tough times. DGIers know that DGI is a long-term strategy. None of them are expecting to get rich quick. By choosing DGI they know they can relax through all sorts of market cycles, over many years and decades, and continue to collect and reinvest their dividends quarter after quarter, year after year, and that in the end the results will be exceptional. None of them is expecting, or needs, one of their stocks to quadruple in the next year to be successful. A 6-10% per year return, for many years, will eventually lead to great wealth. And they are willing to take this slow approach. I can be very patient, as long as I know what it is I am waiting for, and as long as I can see progress as time goes on. With DGI I receive dividends every month. And those dividends keep increasing year after year. So even if I'm not seeing immediate capital appreciation, as long as I continue to see the dividend growth I am expecting, then I can be patient knowing that the price appreciation will come, and in the meantime I am receiving ever growing income.
4. They control their emotions
Emotions can work against you when investing. In my opinion it is the volatility of stock prices that leads to most of the emotions and to over reactions. If you are watching stocks go up and down you may end up making emotional decisions, buying or selling at the wrong time. And in the end these hasty moves may work against you. But with DGI you focus on the dividend, not on the stock price. So you are, for the most part, unaffected by the emotional roller coaster ride that can be the stock market. During bear markets, as prices drop, as long as your dividends keep increasing, you are able to keep your emotions in check and continue to hold on until the market inevitably bounces back. This is definitely one of my strengths, and it fits in perfectly with DGI. I'm able to look at things methodically, logically, and rationally. I've studied DGI, I've crunched the numbers, and I know that my efforts will be rewarded as long as I stay patient, follow my plan, and control my emotions.
5. They are focused
DGIers are focused on the dividend. By tuning out all the other extraneous information, especially the stock price, they are able to stick to their investing plan. I used to dabble in all sorts of investing techniques. Day trades, covered calls, some amateurish technical analysis; I would try whatever tickled my fancy that day. Needless to say my results were horrible. But now I am focused on DGI. And since it works, since it makes so much sense, and since I can see more dividends being deposited into my account every week, it makes it easy to stay focused on my chosen method.
6. They are persistent
When you find a winning strategy you stick with it, through good times and bad. If you can't stick with it through bad times then you have the wrong strategy. Fortunately DGI is a strategy that makes it easy to weather the tough times. Even if the prices of your stocks have stagnated, or even are dropping, you will see your dividends continue to roll in. And you will be able to reinvest your dividends, buying more shares at even better prices. The strategy of DGI makes it very easy to be persistent and stick with your plan.
7. They know how to manage risk
In one of these articles it said a successful investor needs to "Thrive on Risk". I completely disagree. I don't think you need to thrive on risk to be a good investor. I think you have to understand that it exists, understand how much you are willing to take, and you have to learn how to manage it. But you don't have to "thrive" on it. And I don't believe the general "rule" that to increase return you must take on more risk. DGI does exactly the opposite. I believe it decreases risk because DGIers invest in mature, well-run companies, with proven track records of returning profits to their shareholders. The dividends themselves decrease risk because regardless of what the stock price does you are getting a return on your money. And as the dividend increases, year after year, the stock price can't help but follow along eventually. I believe that well constructed DGI portfolios actually minimize risk, while still delivering acceptable, possibly even market-beating returns.
8. They are disciplined
Once you define your investing strategy and your rules, you must stick to them. You must be disciplined in carrying them out. Don't let emotions sway you from your plans. If you find that over time your plan is not working, then you go ahead and change the plan. But you don't go making knee jerk decisions based on what is happening at the moment. Once again, DGI is the perfect strategy to keep someone disciplined because the dividends let you see the progress you are making and they help you stick to your plan.
9. They learn quickly from their mistakes
This is very true, but it is not unique to DGI. To be successful with any method of investing you must learn from your mistakes and change what you do to account for your past experiences. Everybody makes mistakes, but it is what you do after you make the mistakes, how you change your plan based on them, that matters.
10. They are willing to learn from others
You need other people to learn from, to exchange ideas with, to discuss experiences with, etc… And that is why Seeking Alpha is so valuable. I have learned more from reading articles on Seeking Alpha then I have from reading any books. Warren Buffett was taught by Benjamin Graham, and later on Charlie Munger had a great effect on his thought process. And if Buffett can learn from others so can the rest of us.
11. They are passionate about investing
To be a successful investor you have to be willing to put in the time and effort to learn what you are doing, set up a plan, execute that plan, and continue to follow your portfolio to make sure your plan is working. And you always have to be willing to keep learning and adjusting your plan, because no plan is perfect, and everybody can improve on the results. And I think you have to really enjoy it to stick with it and do it well. Nobody can successfully carry out a 30-50 year plan successfully if they are not passionate about it. The DGIers I have met are very passionate about their investing, and they have to be because they all know going into it that it is a long term commitment that will need them to pay attention and continue learning through many years and decades.
12. They are contrarian
As Warren Buffett said (and I paraphrase) you should be greedy when everybody else is fearful, and fearful when everybody else is greedy. Successful investors go against the herd. When everybody else is selling they are buying. They look for value. They look for stocks that have been sold off for some reason, and that are therefore trading for below their intrinsic value. A perfect example of this is the financial meltdown of 2007-2009. Dividend growth investors were snapping up shares of dividend champions whose prices had dropped due to the market crash. They knew that even though everybody else was selling, these companies were still strong financially, and were still raising their dividends. As the market finally turned around these stocks returned to, and even surpassed, their pre-meltdown prices. And the whole time the dividends kept rolling in.
DGIers are also contrarian in that, once they own a stock, they ignore that which everybody else is focused on. The price. DGIers focus on the dividend.
13. They set their own goals.
A successful investor sets his own goals as to what he or she is hoping to accomplish, and then they set up their strategy do achieve that goal. They don't worry about what the market is doing. They don't worry about what financial experts say they should be trying for. They don't worry about having to match a certain index (unless they decide that that is their goal).
For many DGIers their goal is based on the income their portfolio will eventually produce, and not on the actual value of the portfolio. They determine what income they desire, and then they build a plan that allows them to achieve that income. And since the expected yearly increase in their dividend income is somewhat predictable, they can project forward and see the expected income for each year, and follow their progress to see if they are meeting their goals.
14. They have humility
A successful investor knows they are not perfect, knows they don't know everything, and knows they will make mistakes. They know that they will always have more to learn and that they can always do better. And because of this they are always trying to improve. And they learn from their mistakes.
Conclusion
I'm sure others will add more qualities to this list, and that's great. Because as I already mentioned above, we can all learn more, and we can all learn from each other. By no means do I believe that my list is final, and that no other qualities are important for successful investing. These are the ones I have settled on for now, but I'm sure others will be added in the future.
And as I see it the DGI strategy fits these qualities perfectly. By recognizing these qualities in yourself, or developing them if you don't have them, and by applying them to DGI you can become a successful investor and ensure yourself a secure financial future.
Thank you for reading my article. I welcome your comments and criticisms.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.