What I am interested in is what makes a good stick picker, or an analyst who can really add value by finding the investments that outperform.

Firstly I will leave aside the obvious. A good stock picker or analyst needs to be good at financial analysis, understand the companies, sectors or economies they look at, understand valuation issues etc. There are simply too many people with these skills for them to give a stock picker an edge. What we need is the ability to consistently pick stocks that are mispriced, this can only (legally) come though significantly better analysis than the market as a whole, and the market as a whole reflects the views of people who are very competent.

My boss at my first job as an analyst said that good analysts need to be a little “strange” (he had been one himself so he was not being unduly rude!). I think he was right because in order to see things that others have missed you need to be different from them. Given the quality of the people you are competing with the chances of doing this through sheer brilliance are pretty low. This leaves simply being different as the alternative.

Part of the necessary difference can come from being good at what is sometimes called lateral thinking. This is the key to seeing things other have missed, the insights that give the edge.

The curiosity to pick up knowledge that others do not have also helps. There is a huge range of things that knowing or being good at can help a stock picker – anything relating to any industry, to any fashion driver, politics, economics, technology and anything that can sell something, or cost something.

Finally as one of the biggest pitfalls for investors is a tendency to follow the herd, seeking safety in numbers doing what everyone else is. This is most obvious during bubbles but happens all the time. The ability to stay dispassionate and not follow the herd is therefore crucial to both avoiding mistakes (such as buying at the height of a bubble) and spotting opportunities (such as buying when the market is unduly pessimistic).

The last of these is an matter of personality and emotional make-up. It requires being different from the crowd, but, at the same time, being too peculiar does not do – one of the core competencies I mentioned at the beginning is the ability to judge and understand people: other investors, company management etc. It also requires a lot of self confidences (to say “everyone else is wrong and I am right”). A dash of courage helps.

The personality traits are rare and hard to develop, as is lateral thinking, which is why these are the rarest of the traits of a good stock picker.