What signs show that an investor is successful after a year of being in the field?
I know an obvious answer would be, "Someone making a lot of money is probably a successful investor." I'm talking about short term investments when returns most likely are not very high. What observations can you make from the market that tells you you're on a good path?
What an interesting question. First, a successful investor must have a good understanding of risk. In other words he or she would need to know when to cut losses and sell his or her positions. They would have to operate in such a way that they did not allow their emotions of fear and greed to dictate their decisions when it came to buying and most importantly selling their stocks. A successful investor would buy stocks that are fundamentally strong (have good revenues and earnings) and that are leaders in their sector or universe of stocks. A successful investor would also be quick to sell their stock(s) when they become laggards in their sectors or in the market. Finally, it is much easier to make up for lost opportunity instead of lost money. Much success!
Figure out what is an appropriate benchmark to compare your performance to. For instance, let's say you started investing 12 months ago, and selected a portfolio of stocks. A reasonable benchmark might be the S&P 500 index. If the S&P 500 is up more than your portfolio - then your stock selection skills might not be the best. But don't sweat that - most professionals can't beat the index either. (that's why most investors are better off just buying the index - you will beat most pros at their own game). If you are invested in a more diversified portfolio, it is harder to measure success. If your goal is a moderate allocation, you could choose a well known moderate allocation strategy fund like the Vanguard Lifestrategy Moderate Growth Fund. Again, if you can't beat the benchmark - you can always buy it!
This is an excellent question and there are two general answers based on your perspective. But the short answer is you can’t tell. A one-year investing track record is much too short of a time frame to determine if the investment returns you are seeing are the result of skill or luck. Typically, you need at least three to five years of returns to even begin to make a determination of investment skill versus random chance or luck.
The longer answer, for a longer time frame, is based on two different definitions of a successful investor.
The first definition comes from a personal perspective. You should consider yourself a successful investor if your current savings and investments are meeting, or will meet, your current and projected financial goals. For example, if you are currently working and need to save for retirement, your goal may be to save 15% of your earnings and obtain investment returns in line with the overall market for the next 25 years. In this case you are not trying to beat the market but to secure market-like returns. On the other hand, if you are retired, your investment goal may be to generate returns sufficient to support your standard of living for the rest of your life. You might have no desire to beat the market or “make lots of money”, but rather to decease the ups-and-downs, or volatility, of your overall portfolio so that you do not have to worry about short-term market corrections.
The second definition of successful investor comes from the perspective of an investor who is choosing an investment manager. There are several ways in which to judge the performance of a manager with whom you may want to invest. As I mentioned, you need at least three years of investment performance, five or more is better, to begin an evaluation. Once you have the investment track record in hand, the next question is to ask is “are their returns better than what?” The standard by which you compare an investment manager is referred to as their “benchmark.” For example, if an investment manager (or you) has been investing in small capitalization U.S. stocks for the last five years, then their appropriate benchmark maybe the Russell 2000 index. Alternatively, if the manager is investing in China stocks then the appropriate benchmark maybe the MSCI All China Index. If the manager has consistently beaten his or her benchmark, or had a positive relative return, then you may tentatively say that they have been successful.
Besides looking at raw and relative returns there are a host of risk-adjusted returns that should be examined at along with other Modern Portfolio Theory (MPT) risk statistics to create an overall appraisal of an investment manager.
The point is that you can’t look at returns or “making a lot of money” in isolation but rather in comparison to appropriate slice of the market.
Most importantly, when choosing an investment manager you need to remember the hackneyed saying “past performance is no guarantee of future results.” Just because a manager has outperformed her benchmark in the past it is no guarantee that they will do so in the future. In fact, there is a body of research, called SPIVA, that demonstrates that outperformance is not persistent.