3 Qualities Warren Buffett Says All Great Investors Should Have

At Berkshire Hathaway's (NYSE: BRK-A) (NYSE: BRK-B) 2002 annual meeting, Warren Buffett was asked whether great investors are born or made. Buffett replied that he wasn't sure how much of being a great investor was innate and how much could be learned, but he did discuss some qualities all great investors should have.

Surprisingly, a high IQ isn't one of them. As Buffett put it, "You do not need to be terrifically smart to do well as an investor at all." However, great investors should have certain qualities, and here are three specific traits he mentioned.

Be realistic

"You have to be realistic. You have to define your circle of competence accurately. You have to know what you don't know, and not get enticed by it," Buffett said.

In other words, it's important to know your strengths and weaknesses if you want to be a great investor. This is why Buffett has historically avoided investing in tech stocks -- he knows himself well enough to realize that he doesn't understand the industry sufficiently to make smart investment decisions. However, he does understand businesses like insurance, banking, and utilities, so you'll find quite a few of these businesses among Berkshire's subsidiaries and stock portfolio.

In addition, being realistic includes managing your expectations. Don't chase huge, fast returns -- returns that are good, but steady, will win in the long run. "If you're very greedy, it will be a disaster, because that will overcome rationality," Buffett remarked.

A thirst for knowledge

Many investors are surprised to learn that Warren Buffett spends most of his workday reading. However, it's tough to over-emphasize the value Buffett places on accumulating knowledge.

Buffett is known to recommend some of his favorite investing books to Berkshire's shareholders, and he has a particular fondness for the investing books by Benjamin Graham -- The Intelligent Investor and Security Analysis. He also says that Phillip Fisher's books Common Stocks and Uncommon Profits and Paths to Wealth Through Common Stocks played a big role in his investing mentality.

"I think the same books I read and really molded what I thought about business and investing are just as valid now... I have seen nothing to improve on Graham and Fisher in terms of the basic approach of going about investing, which is to think about stocks about businesses and what makes a good business," said Buffett.

I recently published a "Buffett book list" that includes these and some other Buffett favorites. But don't stop there. If you want to be a great investor, learn all you can.

Don't follow the crowd

Buffett has repeated this advice many times. In his 2008 letter to Berkshire Hathaway shareholders, Buffett wrote "Beware the investment activity that produces applause; the great moves are usually greeted by yawns."

Then, in 2009, during the depths of the Great Recession, Buffett said that "Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance."

The bottom line is that following the crowd into the latest "it" stocks or moving in and out of stocks based on what everyone else is doing is a losing strategy, and one that generally leads to the investor underperforming the market over time.

"It's not a complicated process, but it definitely requires discipline," Buffett said. "It requires insulating yourself from popular opinion."

What if you don't have the qualities of a great investor?

If these three qualities don't describe you, that's OK. In this case, you have two (equally good) options if you want to be an effective investor.

First, you can choose to stick to index fund investing. This guarantees that you'll do just as well as the market, or your funds' underlying indices, and this has worked out pretty well over time. In fact, Buffett has said that passive, low-cost index funds are the best investment most people can make.

The second option is to try and evolve your mindset into that of a great investor. Spend some time clearly defining your circle of competence and make a plan to only invest within it. Read some of the classic investing books, and learn all you can as you go. And finally, practice avoiding "crowd mentality," instead actively evaluate and implement your own investment ideas.

The first option is by far the easier of the two, but if you have the time, knowledge, and desire, you might be able to learn to think and act like a great investor.

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Matthew Frankel owns shares of Berkshire Hathaway (B shares). The Motley Fool owns shares of and recommends Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.