The six habits of highly effective investors

On a sunny day in New York in 2011, a Starbucks customer was kicking up a fuss while ordering her daily coffee. The employee, who was taking the order, had already had a bad day, and the complaining became all too much. So rather than write the customer’s real name on the coffee cup, the employee decided to write a derogatory name (starting with ‘b’).

On receiving the coffee, the customer soon spotted the obscenity, and immediately rang a major TV outlet to report her story. Within hours she was giving interviews, and in no time at all, the story was viral on YouTube receiving more than 10 million views within 48 hours. It was a public relations disaster for Starbucks.

After many apologies the incident settled down, but Starbucks management wanted to ensure it never happened again. To do this, they developed a training course called LATTE, which showed employees how to handle customer complaints. The acronym LATTE stands for Listen, Acknowledge, Take action (e.g. give the customer a free cup of coffee), Thank them, and Explain.

The LATTE program was designed specifically to create good habits in the Starbucks workforce. And it worked. Incidents such as the coffee-cup incident stopped occurring, employee satisfaction went through the roof, and so did customer satisfaction.

Habits

So, what is a habit? According to author Charles Duhigg in his book, The Power of Habit, a habit is a routine of behaviour that if repeated enough becomes automatic. Habits occur subconsciously, and it’s estimated that between 40% - 45% of our daily activity is made up of habits.

Habits are comprised of cues, routines, and rewards. In the example of the Starbucks LATTE program, the cue is an angry customer, the routine is to follow LATTE, and the reward is a placated customer who now thinks the staff member is wonderful for listening to their problem and solving it.

So how do we get rid of bad habits? We first need to think through all the cues, routines, and rewards in the habit, to determine why we do it. We should then replace those bad habits with good habits, ensuring the good habits also have good rewards.

Another approach is to change the environment around our bad habits, to make those habits harder to do. In the same way, we can change the environment around our good habits to make those habits easier to do. For instance, if we want to exercise regularly, we can arrange to team up with a friend to have a daily walk. This provides us with consistency, and with the reward of fun, social time, and feeling healthier.

Good investing habits

To become a good investor, it’s essential to develop good habits. Here are six of the best:

1. Start early. Compound interest was once described by Einstein as the ‘eighth wonder of the world’. The sooner a person starts their investment journey, the longer the time the investments have to grow. Charlie Munger said, ‘Getting wealthy is like rolling a snowball. It helps to start on top of a long hill. Start early and try to roll that snowball for a very long time’.
2. Invest regularly. One great habit is to always spend less than you earn. By doing this, it creates regular savings that can be put towards your financial goals. Another great habit is dollar-cost-averaging. This is putting money regularly into the share market, to capture both the ups and downs in the market.
3. Diversify your portfolio. It can be tempting to put all your eggs into one or two baskets in the hope of a big win, but this is incredibly risky. Diversification is the process of allocating capital across a number of stocks and sectors, so that if there is a big fall in one stock, then overall your portfolio is protected.
4. Invest for the long term. Markets will always have ups and downs, and it’s through the down times that we need to remind ourselves of our long-term investment goals. As per the old adage, time in the market beats timing the market.
5. Always do research. Buying stocks on a hunch very rarely works. Whenever we want to buy an investment, we should either do a lot of research ourselves, or if we are buying into a fund, ensure the fund manager is doing a lot of research.
6. Become a learning machine. Be a lifelong learner who each day learns something new through reading, studying, or listening to wise people. Charlie Munger said, ‘I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up. And boy does that habit help, particularly when you have a long run ahead of you’.