The Winning Investment Habits of Warren Buffett & George Soros by Mark Tier

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Book Summary:

The Power of Mental Habits

Mental habits are important to a successful investor. The author discovered many master investors had the same winning habits and it makes no difference in which investment field they specialize in or the cultural background they come from.

The Seven Deadly Investment Sins

  1. Believing that you have to predict the market’s next move to make big returns
    Highly successful investors like Soros and Buffett are no better at predicting the market’s next big move than you and I.
  2. The “Guru” belief: if I can’t predict the market, there’s someone somewhere who can – all I need to do is find him.
    If you could really predict the future, you would quietly win the money yourself and not tell anyone about it.
  3. Believing that “Inside Information” is the way to make really big money.
    Warren Buffett’s favourite source of investment “tips” is the company annual report.
  4. Diversifying
    Warren Buffett’s amazing track record comes from identifying a small number of companies and take huge positions in these companies.
  5. Believing that you have to take big risks to make big profits.
    Successful investors are highly risk-adverse and do everything they can to avoid risk and minimize loss.
  6. The “System” belief: somebody, somewhere has developed a system that will guarantee investment profits.
    This is similar to the “guru” belief where investors are looking for a sure thing and the truth is, there is no sure thing.
  7. Believing that you know what the future will bring
    He who believes he already knows the future, would eventually loses most of his capital when the mania comes to an end.

Winning Habit #1 – Preservation of Capital is Always Priority #1

The Losing Investor’s investment aim is to make lots of money and they often fail to keep it. Warren Buffett’s famous phrase “Investing Rule No.1: Never Lose Money. Investing Rule No.2: Never forget Rule No.1“. George Soros mentioned – “Survive first and make money afterwards”.

Winning Habit #2 – Passionately Avoid Risk

The Master Investor is risk-averse while the Losing Investor thinks big profit can only be made by taking big risks.

To manage risk, Master Investors use:

  1. Don’t invest – When they cannot find a suitable investment, they do not invest at all.
  2.  Reduce risk – Buffett will only invest when he can buy at a price significantly lower than the estimated value of a business. Warren Buffett – “It’s not risky to buy securities at a fraction of what they are worth”.
  3. Actively managing risk – Soros would constantly monitor the market and change course immediately when necessary. George Soros – “To survive in the financial markets sometimes means beating a hasty retreat”.
  4. Manage risk actuarially – Deal with averages, not individual events. Make sure the odds or probability of winning is tilted to your favor such that, on the average, you can win.

Winning Habit #3 – Develop Your Own Unique Investment Philosophy

The Master Investor has developed his own investment philosophy based on his personality, abilities, knowledge, tastes and objectives. No two successful investors have the same investment philosophy. On the other hand, the Losing Investor has either no investment strategy or uses someone else’s.

Winning Habit #4 – Develop Your Own, Personal System for Selecting Buying and Selling Investments

The Master Investor has developed and tested his own personal system for selecting, buying and selling investments while the Losing Investor has no system. The latter has adopted someone else’s system without testing and adapting to his own personality.

Winning Habit #5 – Diversification is for the Birds

The Master Investor does not diversify and believes only ignorant investors practice it. The Losing Investor lacks confidence to take a huge position on any one investment.

Warren Buffett – “Diversification is a protection against ignorance. [It] makes very little sense for those who know what they’re doing.”

Winning Habit #6 – Focus on After-tax Return

The Master Investor always make an effort to legally minimize his tax bill while the Losing Investor neglects taxes and transaction costs, which affects his investment performance.
Warren Buffett – “The really good manager does not wake up in the morning and say, ‘This is the day I’m going to cut costs,’anymore than he wakes up and decides to practice breathing.”

Winning Habit #7 – Only Invest in What You Understand

The Losing Investor does not realize that a deep understanding in what he is doing is an essential prerequisite to success and rarely realizes that profitable opportunities exist within his own area of expertise.
Warren Buffett – “The market, like the Lord, helps those who help themselves. Unlike the Lord, the market does not forgive those who know not what they do.”

Winning Habit #8 – Refuse to Make Investments that do not Meet Your Criteria

The Losing Investor has no criteria to filter investments and cannot say “no” to his own greed. Warren Buffett – “If you don’t inderstand it, don’t do it.”

Winning Habit #9 – Do Your Own Research

The Master Investor is continually searching for new investment opportunities that meet his criteria and actively engages in his own research. The Losing Investor is looking for the easy way out and hopes to earn money fast. He would often follow the “hot tip of the month”.
Warren Buffett – “If I’m interested in a company, I’ll buy 100 shares of all its competitors to get their annual reports.”

Winning Habit #10 – Have Infinite Patience

When the Master Investor cannot find an investment that meets his criteria, he has the patience to wait indefinitely until he finds one that does. The Losing Investor feels he needs to be doing something in the market at all times.
Warren Buffett – “The trick is, when there’s nothing to do, do nothing.”
George Soros – “To be successful, you need leisure. You need time hanging heavily on your hands.”

Winning Habit #11 – Act Instantly

The Master Investor acts instantly when he has made a decision while the Losing Investor procrastinates. Warren Buffett – “When we see something that makes sense, we’re willing to act very fast and very big.”

Winning Habit #12 – Hold a Winning Investment Until There’s a Pre-Determined Reason to Sell

The Master Investor holds on a winning investment until a pre-determined reason to exit arises. The Losing Investor rarely has a pre-determined rule for taking profits and often worried about a small profit can turn into a loss, so he cashes in early and misses big gains.

Winning Habit #13 – Follow Your System Religiously

While the Master Investor follows his own system religiously, the Losing Investor “second-guesses” his system (if he has one in the first place).

Winning Habit #14 – Admit Your Mistakes and Correct Them Immediately

The Master Investor is aware of his own fallability and corrects his mistakes the moment they became evident. This explains why he rarely suffers more than small losses. The Losing Investor hangs onto losing investments in the hope that he’ll be able to “break even”. As a result, often suffers huge losses.
George Soros – “Where I do think I excel is in recognizing my mistakes… that is the secret to my success.”
Warren Buffett – “An investor needs to do very few things aas long as he or she avoids big mistakes.”

Winning Habit #15 – Turn Mistakes Into Learning Experiences

The Master Investor always treats mistakes as learning experiences while the Losing Investor never stays with any one approach long enough to learn how to improve it.

Winning Habit #16 – Pay Your Dues

As the Master Investor’s experience increases, so does his returns. He then spends less time to make more money and has so called “paid his dues”. The Losing Investor is not aware that it is necessary to “pay his dues” in order to be successful in investing. He also rarely learns from experience and tends to repeat the same mistakes.

Winning Habit #17 – Never Talk About What You’re Doing

The Master Investor would not talk to anyone about what he is doing and he is also not interested or concerned with what others think about his investment decisions. The Losing Investor always talk about his investments and “tests” his decisions against others’ opinions rather than against reality.
Warren Buffett – “My idea of a group decision is to look in the mirror.”

Winning Habit #18 – Know How to Delegate

The Master Investor has successfully delegated most if not all of his responsibilities to others while the Losing Investor selects investment advisors and managers the same way he makes investment decisions.
Warren Buffett – “In evaluating people, you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you.”
George Soros – “I am willing to use different people employing different approaches as long as I can rely on their integrity.”

Winning Habit #19 – Live Far Below Your Means

The Master Investor lives far below his means and the Losing Investor lives beyond his means.
George Soros – “Probably the most tangible benefit [of being a billionaire] is that I get very good tennis games.”
Warren Buffett – “Money, to some extent, sometimes lets you be in more interesting environments. But it can’t change how many people love you or how healthy you are.”

Winning Habit #20 – It’s Not About the Money

The Master Investor does what he does for simulation and self-fulfilment but not for money. The Losing Investor is motivated by money and thinks investing is the easy way to get rich.
Warren Buffett – “I’ll keep [investing] as long as I live.”

Winning Habit #21 – Love What You Do, Not What You Own

The Master Investor is emotionally involved with and gets his satisfaction from the process of investing. He can walk away from any individual investment. The Losing Investor falls in love with his investments.
Warren Buffett – “I have enjoyed the process [of making money] far more than the proceeds, though I have learned to live with those, also.”

Winning Habit #22 – Live and Breathe Investing 24 Hours a Day

The Master Investor lives and breathes investing 24 hours a Day. The Losing Investor is no fully dedicated to achieving his investment goals.

Winning Habit #23 – Put Your Net Worth on the Line

The Master Investor puts where his money where his mouth is. His personal wealth is identical to that of the people who has entrusted money to his management. Warren Buffett has 99% of his net worth in Berkshire Hathaway and George Soros keeps most of his money in Quantum Fund. On the other hand, investments of the Losing Investor contribute little to his net worth. In fact, these investments often make losses which have to be made up by other sources of income like salary.

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