William Ackman on the Psychology of the Successful Investor

Following the meltdown of the financial system in 2008, subsequent economic downturn, innumerable investigative journalism pieces about the big banks and investment practices, and finally the rise of the Occupy movement, it’s safe to say that finance and investing have taken a high-profile position in the mind of the public. People who wouldn't know Freddie Mac from a hole in the ground four years ago are now paying attention to the meta-structure of the US economy in an unprecedented fashion.

Combine this with the meteoric rise of new tech companies in the last decade, such as Apple, Facebook, and Google, which routinely make headlines with news of IPOs and stock prices, and it’s safe to say that Americans are more critical of and interested in investment practices in general. We’re also entering a new era where potential investors can follow a company from its buzz-y birth, a la Groupon, to its debut on the public exchanges, and take an active part in becoming a part of a company that they themselves understand and use, far removed from arcane financial instruments utilized by hedge funds and investment banks.

In this light, retail investing, i.e. individuals buying stocks to build personal portfolios and plan for retirement, could well be entering a new era, as anyone with a laptop and an eye for business news can follow the information along with the rest of the market, along with a healthy dose of post-crash skepticism. But the age-old question remains: what makes a good investor? And how do the recent market woes affect the average person?

Burton G. Malkiel’s personal investment book A Random Walk Down Wall Street famously states that "a blindfolded monkey throwing darts at a newspaper's financial pages could select a portfolio that would do just as well as one carefully selected by experts." This assertion is generally based on longitudinal studies showing that most successful professional investors will, over time, come closer and closer to the market average, despite earlier luck or innovative practice. (Makliel’s monkey dartboard notion became so popular that The Wall Street Journal ran over 100 simulated dartboard contests from 1988 to 2001. The results: inconclusive.)

So what’s an individual investor to do, if even the pros can’t demonstrably do better than random chance most of the time? Here’s Floating University lecturer William Ackman discussing a core conceit of successful investing:

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