What makes a great investor?

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Just had what I think is an interesting debate over on Facebook with my friend Conor Neu, a very successful trader. Thought it was worth re-printing in part here:

I originally wrote:

“Success as an investor is about figuring out how to take big bets where you lay the risk off on someone else and capture the upside for yourself.”

Conor responded:

“Can’t say I entirely agree with that definition. Diversification is a key part of investor success. I assume by “big bets”, you mean he made a few big ones rather than many small ones. I’d rather take a million little ones than 10 big ones. Fewer big bets are not a part of investor success. They may be a part of people being seen as “lucky” or “unlucky”, but not a part of general investor success over the long run. Not saying this does or does not apply to Romney, but that definition is inaccurate so I’m not sure the point makes sense.”

Conor’s absolutely right, from an investor’s perspective.

I was thinking about private equity-style investing from the perspective of the guy running the fund. There, the goal is to identify high-return, low-risk investment opportunities in an illiquid market with high transaction costs. It’s relatively easy to find small deals that “work” (generate high returns) in that kind of market. For example: Right now, anyone competent can find a house or condo to flip and make $50k on an investment of $200k in cash (a 25% IRR).

But it’s very difficult to find large deals to do, in part because there are fewer big assets to buy than small ones and in part because the quality of the competition gets better as you scale up in asset size. If you can reliably generate 25% IRR on $2M, you’re in my business. If you can reliably do it with $200M, you’re famous.

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