A moat is a competitive advantage one company has over the competition. It can’t be easily copied either. Otherwise, it wouldn’t be a moat, it’d be a temporary edge.
The moat comes in several forms — economies of scale, network effects, intellectual property, switching costs, and cost advantage — that produce phenomenal performance over extended periods. Buffett’s focus on moats created a craze around finding these “wonderful companies.”
But before you run off to do the same, consider this. Buffett is unique in that he has his own moat. All great investors do. They have a competitive advantage over everyone else that produces phenomenal performance over extended periods. Without their moat, they’d be like everyone else.
You might think their moat is IQ, the right college degree, or experience. It’s not. Those things are important because they keep you in the game but all those things can be copied to some degree. It’s a temporary edge until a similarly smart, experienced person comes along. Besides, up to a certain point, an extra IQ point or one more experience brings less to the table.
So it has to be something else. Marks Sellers believes it’s psychological:
So what are the sources of competitive advantage for an investor? Just as with a company or an industry, the moats for investors are structural. They have to do with psychology, and psychology is hard wired into your brain. It’s a part of you. You can’t do much to change it even if you read a lot of books on the subject.
He would go on to identify 7 traits all great investors share that give them an edge over everyone else.
Buy in a panic and sell during a bubble.
Trait #1 is the ability to buy stocks while others are panicking and sell stocks while others are euphoric. Everyone thinks they can do this, but then when October 19, 1987 comes around and the market is crashing all around you, almost no one has the stomach to buy. When the year 1999 comes around and the market is going up almost every day, you can’t bring yourself to sell because if you do, you may fall behind your peers.
It’s an obsession.
The second character trait of a great investor is that he is obsessive about playing the game and wanting to win. These people don’t just enjoy investing; they live it. They wake up in the morning and the first thing they think about, while they’re still half asleep, is a stock they have been researching, or one of the stocks they are thinking about selling, or what the greatest risk to their portfolio is and how they’re going to neutralize that risk.
Learn from mistakes.
A third trait is the willingness to learn from past mistakes. The thing that is so hard for people and what sets some investors apart is an intense desire to learn from their own mistakes so they can avoid repeating them. Most people would much rather just move on and ignore the dumb things they’ve done in the past.
Common sense view of risk.
A fourth trait is an inherent sense of risk based on common sense. Most people know the story of Long Term Capital Management… They never stepped back and said to themselves, “Hey, even though the computer says this is ok, does it really make sense in real life?” The ability to do this is not as prevalent among human beings as you might think. I believe the greatest risk control is common sense, but people fall into the habit of sleeping well at night because the computer says they should.
Great investors have confidence in their own convictions and stick with them, even when facing criticism… Personally, I’m amazed at how little conviction most investors have in the stocks they buy.
Use their entire brain, not just the math side.
I believe a great investor needs to have both sides turned on. As an investor, you need to perform calculations and have a logical investment thesis. This is your left brain working. But you also need to be able to do things such as judging a management team from subtle cues they give off. You need to be able to step back and take a big picture view of certain situations rather than analyzing them to death. You need to have a sense of humor and humility and common sense. And most important, I believe you need to be a good writer… If you can’t write clearly, it is my opinion that you don’t think very clearly. And if you don’t think clearly, you’re in trouble.
Live through volatility.
The most important, and rarest, trait of all: The ability to live through volatility without changing your investment thought process… People donít like short-term pain even if it would result in better long-term results. Very few investors can handle the volatility required for high portfolio returns. They equate short-term volatility with risk. This is irrational; risk means that if you are wrong about a bet you make, you lose money… But most people just can’t see it that way; their brains won’t let them. Their panic instinct steps in and shuts down the normal brain function.
A few of these can be learned or improved with practice and time. Some you’re either born with or you’re not. And it’s not a complete list either, but without some of these traits, it’s impossible to be great.
It reminds me of a similar list Michael Mauboussin wrote about in 2016 on the 10 skills of a great investor. Without those skills, you’d never be competitive in the market. He would go on to add four areas that might set you apart.
Both Seller’s speech and Mauboussin’s piece are worth reading.
So You Want To Be The Next Warren Buffett? How’s Your Writing?
Reflections on the Ten Attributes of Great Investors
- You Played Yourself – M. Housel
- You Are Not as Good at Kissing as You Think But You Are Better at Dancing – NY Times
- How Many Stocks Should You Own in Your Portfolio? – Intrinsic Investing
- Investing Titans on When to Sell – MOI Global
- Interview with Aswath Damodaran on Buybacks (pdf) – Goldman Sachs
- How the Kleiner Perkins Empire Fell – Fortune
- How to Create an Institution That Lasts 10,000 Years – Edge
- The Ultimate Productivity Hack is Saying No – J. Clear
- To Change the Way You Think, Change the Way You See – HBR
- The Man Who’s Going to Save Your Neighborhood Grocery Store – LongReads
- Killer in the White House – Saturday Evening Post