01 Mar 2010 | Opinion

Investment - Conviction of the Wise 

Robert O’Riordan on the makings of a good investor

Why are some people better at doing some things than others? In physical terms, it can be clear on first sight who is likely to be the good sprinter and who will be best placed in the scrum. It is much harder to define and spot investment flair.

While endurance and stamina play a part, choosing investments is obviously a cerebral activity possibly leavened by passion and by the harnessing of instinct and experience. Imagination and creativity, as well as an understanding of accounts and ratios, come into play. Pure brainpower on its own cannot provide the entire solution and investment is not only about finding, sifting and analysing available information. Judgement is also required: deciding what is and what is not useful and relevant, seeking to discover the unknown and ignoring what is just noise or ‘in the price’. The ability to separate the wheat from the chaff makes the exceptional investor.

There is some debate about experience. Some say that a lack of experience can be an asset; younger practitioners carry less baggage, can be more decisive, fleet of foot and not set in their ways. However, this thinking creates false stereotypes: there are plenty of decisive older people and an abundance of young ditherers. While experience per se does not carry weight, (we can all easily and endlessly repeat the same mistakes) the intelligent use of experience in helping to form and observe patterns must be very valuable.

Decisiveness must also be important: decisions have to be taken on a constant basis on investments (buy, sell or hold) and the result of decisions can be assessed in a binary way: ultimately an investment is either successful and makes money or is unsuccessful and loses money. The water gets a bit muddier when success is viewed in relative terms and when time is taken into account: you can argue that an investment which makes less money than the average is a poor investment while the timing of purchases and sales is always crucial.

Conversely, sometimes it will pay to be stubbornly indecisive by staying on the sidelines when unsure and just waiting for further information or movement. In a strange way indecision here becomes a form of decisiveness (deciding to do nothing). It is also clear that stubbornness, sticking to one’s guns, can be both a virtue and a vice with only the passage of time delivering the verdict.

There is no one recipe for investment success: gathering information is less important than assessing it and common sense and judgement are paramount. Independence of mind and even eccentricity (seeing things differently and not thinking like everyone else) are great attributes and yield rewarding insights. As a Chinese proverb says ‘A wise man makes his own decisions, an ignorant man follows public opinion’. In the future it will be interesting to see if advances in artificial intelligence yield useful results.

Robert O’Riordan is responsible for liaising with investment trust boards at Baillie Gifford and for communications with shareholders.