Blog - Investing Notes

March 15, 2006 - The Two Habits of Highly Effective Investors?

What are the essential habits of highly effective (wealthy) investors? In his March 2006 paper entitled "Why do Wealthy Investors have a Higher Return on their Stocks?", Yosef Bonaparte analyzes data from the triennial Survey of Consumer Finances to find out why the wealthiest investors achieve superior stock returns. To frame the analysis, he defines two types of investment opportunity search: (1) informal (use of magazines, newspapers, online services and friends or relatives); and, (2) professional (use of experts such as accountants, financial planners and brokers). Using results from recent surveys, he concludes that:

• The return on stock investments increases with both willingness to bear financial risk and effort to search for investment opportunities.
• Wealthy investors on average employ highly productive investment opportunity search strategies (especially via more professional searching), explaining about a third of their outperformance.
• Wealthy investors bear greater financial risks and mitigate these risks with intensified investment research. (They do not just roll the dice with bigger bets.)

In summary, the wealthiest investors exhibit research-mitigated risk-taking and efficient opportunity search.

The author also offers some sociological commentary on the implications of wealth begetting wealth.

It seems to us that there is a boot-strap effect between wealth and successful investing, with increasing wealth enabling more efficient research.

For related items, see our blog entries of:

10/31/05 examining whether individual investors can consistently excel;

5/26/05 on the Adaptive Markets Hypothesis (survival of the richest); and,

4/8/05 for the three major hurdles for successful investing.