The Investment Habits of the World’s Richest Investors

 

Buffett buys companies that he considers to be good bargains. Soros is famous for his speculative forays into the currency markets. Carl Icahn became famous for hostile takeovers.

Warren Buffett, Carl Icahn, and George Soros are the world’s richest and most successful investors. Their investment styles are as wildly different as night and day. Buffett buys companies that he considers to be good bargains. Soros is famous for his speculative forays into the currency markets, which is how he came to be known as “The Man Who Broke the Bank of England.” Carl Icahn became famous for hostile takeovers.

But—Buffett, Soros, and Icahn— all practice the same 23 mental habits and strategies religiously. As do Sir John Templeton, Bernard Baruch, and all the other successful investors I’ve ever studied or worked with. It doesn’t matter whether you buy stocks, short currencies, trade commodities, invest in real estate, or collect ancient manuscripts: adding these mental strategies to your investment armory will do wonders for your bank account.

To make it easy to get going, I’ve distilled these 23 mental habits into these seven simple (though not always easy to follow) rules:

1. If you’re not certain about what you’re intending to do, don’t do it

Great investors are always certain about what they are doing whenever they put money on the table. If they think something is interesting but they’re not sure about it, they do more research.

The great investor’s sense of certainty comes from his own experience and research.

So next time, before you call your broker (or go online), ask yourself: “on a scale of 1 to 10, how certain am I that I will make money?” Choose your own cut off point, but if it’s less than a 7 or an 8, you definitely need to spend more mental energy before making a commitment.

Remember: the great investor’s sense of certainty comes from his own experience and research. If your sense of “certainty” doesn’t come from your own research, it’s probably a chimera.

2. Never take big risks

You probably heard that the only way to make big profits in the market is to take big risks. It’s simply not true.

Warren Buffett, George Soros, Peter Lynch … they only invest when they are confident the risk of loss is very slight.

Okay, what about that person you heard about who made a bundle of money in copper or Footsie futures or whatever by taking on enormous leverage and risk? A few simple questions:

• (a) Did he make any other big profits like that?
• (b) Did he do this last year as well, and the year before that, and the year before that?

If not, chances are that’s the only big profit he ever made.

The great investors make money year in year out. And they do it by avoiding risk like the plague.

(And what did he do with the money? If he spent his profits before he got his tax bill …)

The great investors make money year in year out. And they do it by avoiding risk like the plague.

3. Only ever buy bargains

This is another trait the great investors have in common: they’re like a supermarket shopper loading up on sale items at 50% off.

Of course, the stock exchange doesn’t advertise when a company’s on sale. What’s more, if everybody thinks something is a bargain, the chances are it’s not.

That’s how Benjamin Graham, author of the classic The Intelligent Investor, averaged 17% a year over several decades of investing. He scoured the stock market for what he considered to be bargains—companies selling under their break-up value—and bought nothing else.

Likewise, Warren Buffett. But his definition of a bargain is very different from Graham’s: he will only buy companies he can get at a discount to what he calls “intrinsic value”: the discounted present value of the company’s future earnings. They’re harder to identify than Graham-style bargains. But Buffett did better than Graham: 23.4% a year.

Even George Soros, when he shorted sterling in 1992, was convinced that the pound was so overvalued that there was only one way it could go: down. That’s a bargain of a different kind, but a bargain nonetheless.

4. Do your own legwork

How do they find investment bargains? Not in the daily paper: you might find some good investment ideas there, but you won’t find any true bargains.

The simple answer is: on their own. After all, almost by definition, an investment is only a bargain if hardly anybody knows about it. As soon as the big players discover it, the price goes up.

So it takes time and energy to find an investment bargain. As a result, all the great investors specialize. They have different styles, they have different methods, and they look for different things. That’s what they spend most of their time doing: searching, not buying.

So the only way you’re going to find bargains in the market is the same way: by doing your own legwork.

5. “When there’s nothing to do, do nothing”

A mistake many investors make is to think that if they’re doing nothing, they’re not investing.

Nothing could be further from the truth. Every great investor specializes in a very few kinds of investments. As a result, there will always be stretches of time when he can’t find anything he wants to buy.

For example, a friend of mine specializes in real estate. His rule is to only buy something when he can net 1% per month. He’s a Londoner so—aside from collecting the rent!—he’s been sitting on his thumbs for quite a while.

Is he tempted to do something different? Absolutely not. He’s made money for decades, sticking to his knitting, and every time he tried something different, he lost money. So he stopped.

In any case, his real estate holdings are doing very well right now, thank you very much.

6. If you don’t know when you’re going to sell, don’t buy

This is another rule all great investors follow. It’s a major cause of their success.

Think about it. You buy something because you think you are going to make a profit. You spend a lot of time so you feel sure you will. Now you own it. It drops in price.

What are you going to do?

If you haven’t thought about this in advance, there is a good chance you will panic or procrastinate while the price collapses.

Or … what if it goes up—doubles or triples—what then? I’ll bet you’ve taken a profit many times only to see the stock continue to soar. How can you know, in advance, when it’s likely to be the right time to take a profit? Only by considering all the possibilities.

The great investors all have; and will never make an investment without first having a detailed exit strategy. Follow their lead, and your investment returns should soar.

7. Benchmark yourself.

It’s tough to beat the market. Most fund managers don’t, on average, over time.

If you’re not doing better than an index fund, then you’re not getting paid for the time and energy you’ve spent studying the markets. Much better to put your money in such a fund and spend your time looking for that handful of investments you are so positive are such great bargains that you’re all but guaranteed to beat the market.

Alternatively, consider the advice from a great trader. When asked what the average trader should do, he replied:

“The average trader should find a great trader to do his trading for him, and then go do something he really loves to do.”

Exactly the same advice applies to the average investor.

Find a great investor to do your investing for you, and focus your energy on something you really love to do.