Learning from Master Investors

Growing up, a lot of kids are quick to decide they have dreams to play professional baseball or football, and spend countless hours watching their favorite stars in action. The outcome of this is twofold. One, kids gain a passion for their interests and form life long associations, and more relevantly two, kids study their heroes in an effort to replicate their success and one day walk in the hero’s footsteps.

It’s easy to go out in the yard, throw a few balls around, or shoot some hoops. What’s not easy is to learn the techniques employed by stars like Alex Rodriguez (baseball) or LeBron James (basketball) and replicate those with similar results.

Similarly one could use this analogy in the world of investing. Anybody who wants to make good long term wealth by buying their own stocks should pay careful attention to those that have succeeded before them. While these lessons are most useful in buying and selling your own stocks, they also prove to be very good advice in all matters of personal finance. Paying attention to the “master investors” who have done it before can reap tremendous benefits.

Two investors I particularly admire and are relatively easy to learn from are Warren Buffet and George Soros. Buffett is a Nebraska native and the world’s second richest man, having amassed a fortune of some $60 billion over 50 years. Soros, on the other hand, is an immigrant to the United States from Hungary, and hasn’t done too badly himself – he’s worth about $9 billion.

To those in the know, Soros and Buffett are not directly comparable as they have differing investment styles. Soros approaches investing as an “experiment”, by producing a hypothesis and then finding evidence to either confirm or fault the theory. He then acts on such hypothesis by making large bets. Buffett, on the other hand, calculates the intrinsic value of a company, and buys stock in that company only when the market price presents a significant discount.

Despite these differences, both investors have a lot in common. I found this advice extraordinarily useful both in my professional life and with my person finances.

Here's the list of 23 habits:

A master investor:

1. Believes the first priority is preservation of capital. No return is good enough if assurance of capital cannot be guaranteed.

2. As a result of the above is risk-averse. He avoids risk and tries to limit his exposure at all times.

3. Has developed his own investment philosophy, which is an expression of his personality. As a result, no two highly successful investors have the same approach. They do, however, share some common traits.

4. Has developed his own personal system for selecting, buying and selling investments. Similarly has his own limits and boundaries when taking on debt or refinancing.

5. Believes diversification is for the birds. Recently we saw how correlated all assets really are. If you invest in something you understand with particular emphasis to the first point, there’s no need to diversify into hundreds of different investments.

6. Hates to pay taxes, and arranges his affairs to legally minimize his tax bill. Obviously.

7. Only invests in what he understands. If you do not understand the product or the investment, don’t buy it.

8. Refuses to make investments that do not meet his criteria. Can effortlessly say 'no'.

9. Is continually searching for new investment opportunities that meet his criteria and actively engages in his own research. Buying a particular CD does not preclude you from looking for another with a higher interest rate.

10. Has the patience to wait until he finds the right investment.

11. Acts instantly when he has made a decision.

12. Holds a winning investment until a pre-determined reason to exit arrives. Maturity, fair value or better opportunities would be good reasons.

13. Follows his own system religiously and is not swayed by fads or sales pitches.

14. Is aware of his own fallibility. Corrects mistakes the moment they arise.

15. Always treats mistakes as learning experiences. More is learnt from failure than success.

16. As his experience increases, so do his returns. Nobody is going to make 100% on each and every investment.

17. Almost never talks to anyone about what he's doing. Not interested in what others think of his investment decisions.

18. Has successfully delegated most, if not all, of his responsibilities to others. That doesn’t mean he is not responsible!

19. Lives far below his means. Who wants to keep up with the Jones’ in bankruptcy court?

20. Does what he does for stimulation and self-fulfillment – not just for money.

21. Is emotionally involved with the process of investing; but can walk away from any individual investment. Just because you inherited that mutual fund from grandpa doesn’t mean it’s a good mutual fund.

22. Lives and breathes finance, 24 hours a day. But has the ability to shut it all off and look 5, 10 and 20 years into the future.

23. Puts his money where his mouth is. For example, Warren Buffet has 99 per cent of his net worth in shares of Berkshire Hathaway; George Soros, similarly, keeps most of his money in his Quantum Fund. Ask your broker how much he has in that product he is trying to sell you.

A variation of this list was originally published in the book “The Winning Investment Habits of Warren Buffett and George Soros”, by Mark Tier. I highly recommend it.