Being fearful when others are greedy and greedy when others are fearful may be Warren Buffet's rule of thumb. But the carnage in stocks, bonds, and real estate that humbled many investors last year may require more important personal qualities.
Indeed, an extra dose of humility – alongside a few other time-tested virtues – may be just what investors need in order to capitalize on 2009's opportunities.
Knowing one's limits helps avoid mistakes that repeatedly plague investors. Overconfidence can lead them to pay too much for assets, observers say. Arrogance keeps them from learning from their mistakes.
"Some managers will think they're right and the market is wrong, and that's the kiss of death," says Lois Peltz, CEO of hedge-fund tracker Infovest 21 and author of "The New Investment Superstars: 13 Great Investors and Their Strategies for Superior Returns."
The best investors, by contrast, are both disciplined and intellectually curious, she adds. That means they stick with their chosen methods day in and day out but nevertheless make a point to learn from missteps.
As an example of an investor whose habits have made him a great one, she points to John Henry, a hedge-fund manager and principal owner of the Boston Red Sox. He aims to make his biggest money when markets stumble, so he wasn't hitting many home runs during the long bull run from 2003 to 2007.
But 2008 brought vindication of his disciplined methods, which include staying in commodity and currency markets when they get super-volatile and short-selling when necessary to profit from tumbling prices. Through mid-December, his six investment programs were posting returns of 35 to 83 percent for the year.
Experts also encourage big thinking rather than narrow obsessiveness. Investors should know a lot about what they buy, but they should also cultivate a wide breadth of knowledge, says John Train, chairman of Montrose Advisors in New York and a 50-year veteran of Wall Street. That helps them recognize, for instance, when patterns in economic history are repeating themselves.
Tom Barrack, CEO of Colony Capital in Los Angeles, makes a similar point: "If you look at every great investor in private equity, they're all Renaissance men or women," he said in a 2008 speech at Stanford Graduate School of Business. "They're all involved in bizarre things because all of those life experiences bring a point of view that's much more flexible" than those of less successful investors.
"Emotional intelligence … in the investing world, that's what matters," says Professor Shiller, coauthor of the forthcoming "Animal Spirits: How Human Psychology Drives the Economy and Why It Matters for Global Capitalism." "Everyone's judgments are colored by their emotions, so you have to look at other people's judgments and have to have a sense of where they're coming from. It all comes down to judging people."
Better people-reading skills might have protected individuals from Bernard Madoff's alleged Ponzi scheme that could total $50 billion in losses.
Thinking outside the box can help, too. David Gardner, coauthor of a new book "Million Dollar Portfolio: How to Build and Grow a Panic-Proof Investment Portfolio," says the role of oddball has helped him craft a market-beating portfolio. He sniffs out stocks of unsung companies in industries with strong growth potential. He looks for smart management and conditions that insulate a firm from significant competition over the coming five years. Then he stiffens his resolve and strays from the pack.
He bought shares in companies such as video-gamemaker Activision, whose stock is now worth some seven times what he paid for it six years ago. He's had some losers, he admits, but as of late December, his portfolio over the past six years had trumped the S&P 500 Index by 33 percentage points.
Still, investors need to retain a sense of balance. An ethic of humility, for example, can go too far. Those who are cowed, who stay on the sidelines too long, miss opportunities of a lifetime.
Good investors "don't learn too much from their mistakes," Mr. Gardner says. They get back in the saddle and keep deploying new capital even when investments in certain categories let them down.
"This is a lot more like figure skating than it is tightrope walking," he says. "You need to be very comfortable with the fact that you're going to fall down a whole bunch of times."