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The Four Obsessions of the World's Greatest InvestorsBy
Monday, December 29, 2014
Want to be a great investor?
Then figure out what the world's greatest investors do... and do that. It's that simple.
Seriously!
I went as far as you can possibly go in school studying investing. But that's not how I learned to be a great investor.
I learned how to be a great investor by learning how the great investors actually made their money. I read as much as I could about their strategies. Then I "modeled" their behaviors to see what worked.
Surprisingly, what the legends did with their money was significantly different than what I learned in school. The theories I was taught in school didn't work out so well in the real world. The legends were rich and my professors weren't. You can't beat the lessons of real-world experience.
Over the years, I've fortunately had a great deal of investing success myself. Even so, I still like to learn how the greats think. That is where the secrets hide. So I was thrilled to see that self-help guru Tony Robbins interviewed 75 investing legends for his new book Money: Mastering the Game.
In his book, Tony says the legends he interviewed shared at least four common obsessions.
They are:
1) Don't Lose
I think this is the most important "obsession" of all...
Hedge-fund manager Paul Tudor Jones, for example, became a billionaire by investing. He has made money for his clients for 28 consecutive years. Here's what he says:
In short, your main goal in investing is to never let a small loss turn into a big loss. In True Wealth, we do this by using trailing stops and diligently following them. 2) Risk a Little to Make a Lot
In True Wealth, I often say things like: "with a stop loss of 10%, our downside risk is 10% and our upside potential is 50%. That gives us a great reward-to-risk ratio."
That is the way you need to think about your investments.
The biggest problem with most investors is they believe you need to take "home-run" risks to have "home-run" returns. You don't.
The path to home-run returns is to make "asymmetric" bets – where your downside risk is much smaller than your upside potential.
Again, the simplest way to control your downside risk is with stop losses.
3) Anticipate
"Most people say 'Ready? Aim! Aim!" billionaire oilman T. Boone Pickens told Tony Robbins, "but they never FIRE!"
"A lot of brilliant people are terrible investors," another legend told Tony. "The reason is they don't have the ability to make decisions with limited information. By the time you get all the information, everyone else knows it, and you no longer have the edge."
The simple message is, you can't wait to trade until everything looks great... Because once everything looks great, there's no upside left.
We invested in China when the picture was cloudy and everyone was scared. If we had waited, we would have missed the trade. Because we invested before everyone had all the information, we're up 40%.
So instead of trying to wait until things look perfect, you need to anticipate.
4) You're Never Done
"Contrary to what most people would expect, this group of achievers is never done!" Tony writes. "They're never done learning, they're never done earning, they're never done growing, they're never done giving!"
The group Tony interviewed is the most elite group of investors ever interviewed. I urge you to check out Money: Master the Game to learn even more about how they think.
I also urge you to remember these four "obsessions" of the investing greats. If you want to succeed in investing, make them your obsessions, too.
Good investing,
Steve
Further Reading:
Find more from Steve on how to greatly improve your reward-to-risk ratio below:
To be a more successful trader and investor, you must have an exit strategy. Dr. Richard Smith believes the simplest thing most individual investors can do to improve is to use trailing stops.
If you don't have a system for determining how much money to put into one investment, you're just shooting from the hip. That's unacceptable – especially when the answer is so simple…
Market NotesNEW HIGHS OF NOTE LAST WEEK
SPDR S&P 500 Fund (SPY)... U.S. stocks
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iShares U.S. Financials Fund (IYF)... U.S. financial stocks
iShares Russell 2000 Fund (IWM)... U.S. small-cap stocks
Market Vectors U.S. Retail Fund (RTH)... retail stocks
PowerShares DB U.S. Dollar Bullish Fund (UUP)... the U.S. dollar
SPDR S&P Health Care Services Fund (XHS)... health care services stocks
SPDR S&P Semiconductor Fund (XSD)... semiconductor stocks
Utilities Select SPDR Fund (XLU)... utility stocks
PowerShares Buyback Achievers Fund (PKW)... share buybacks
PowerShares Dynamic Food and Beverage Fund (PBJ)... food stocks
Vanguard Total Bond Market Fund (BND)... U.S. bonds
NEW LOWS OF NOTE LAST WEEK
CurrencyShares Euro Trust (FXE)... the euro
CurrencyShares Swiss Franc Trust (FXF)... the Swiss franc
CurrencyShares Australian Dollar (FXA)... the Australian dollar
CurrencyShares British Pound Sterling (FXB)... the British pound
PowerShares Yuan Dim Sum Bond (DSUM)... Chinese bonds
Market Vectors Gaming Fund (BJK)... casino stocks
ETFS Physical Platinum (PPLT)... platinum prices
U.S. Natural Gas Fund (UNG)... natural gas prices
iPath Bloomberg Sugar ETN (SGG)... sugar prices
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