Going from ‘good’ to ‘great’ in investing can be a treacherous road.

Once you have the basics down – knowing how companies work and how to buy and sell – it is easy to get caught up in the roar of noise and conjecture as you try to improve your level of understanding and grow as an investor.

The mental conflict this noise creates over different investing styles or ideas can be paralysing. So let’s step back for a moment and re-focus on what makes a great investor.

Billionaire investor Howard Marks is an investing idol of mine for his timeless, straight-shooting investment advice and offers four clear tips for becoming a great investor. Marks noted the advice in a company memo 16 years ago, but the advice has not aged a single day.

Howard Marks. Source: Oaktreecapital.com

Howard Marks. Source: Oaktreecapital.com

1. Check your own mindset

It’s easy to ignore the roar of noise when you know your own investing mindset.

Take some time to zone in firmly on your personal goals, financial means and attitude towards risk. In finance they call this a ‘personal investment statement’. Not every investment will meet your needs.

A rapidly growing, loss making, company like XERO FPO NZX (ASX: XRO) may be a great investment for someone young with time on their side – potentially decades – to watch the company’s growth story play out.

But Xero could be a nightmare if you’re clocking towards retirement and need an income to live off, or can’t sleep at night because of the company’s volatile share price. If this is the case a a strong, cash churning company like CSL Limited (ASX: CSL) may be more appropriate.

2. Never forget valuation

Even in boom times, there can be a very fine line between valuation and speculation. As Howard Marks notes valuations went out the window during the 1999 tech-bubble because buyers were sure someone else would be willing to pay more. It ended in disaster.

To become a great investor you must have a process for estimating and interpreting a company’s valuation. Sydney Airport Holdings Ltd (ASX: SYD) may be a fantastic company, but at a price of 52 times the company’s annual earnings, you need to decide if the company will lead you to exceptional long-term returns.

3. Respect cycles

Great investors should be critical of where a company is in an earnings cycle. This impacts the company’s valuation and includes the wider economic cycle, the credit cycle and the corporate life cycle. In Marks’ own words:

There’s little I’m certain of, but these things are true: Cycles always prevail eventually. Nothing goes in one direction forever. Trees don’t grow to the sky.

Cycles can create risk, but they can also create potential opportunities, as could be the case for a company like Santos Ltd (ASX: STO).

4. Be conscious of investor psychology

Finally, to become a great investor it’s important to have an awareness of investor psychology, the tone of which can give insights into the market’s thinking:

When the man on the street thinks stocks are a great idea and sure to produce profits, I’d watch out. When others are euphoric, that puts us in danger. When others are terrified, the prices they set are low, and we can be aggressive. – Howard Marks.

A strong mindset will help you filter through the noise and form a view on what investors are feeling without caught up with the pressure of fear or greed.

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Motley Fool contributor Regan Pearson owns shares of Xero. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.