Earlier this year I reviewed my top ten investment books of all time on Livewire. My goal was to share some of the perspectives of the world’s best investors. In this wire, I summarise those reviews to identify the top five characteristics of the world's best investors, the 'Super investors'.
Avoiding the losers – risk control
Howard Marks has often remarked:
“If we avoid the losers, the winners take care of themselves”.
The super investors understand the symbiotic relationship between superior performance and risk control. You must manage risk carefully to have superior performance over the long term.
Generally speaking, these investors do not subscribe to the traditional view of risk as volatility. They view risk as the possibility that capital may be impaired, and each super-investor has a strategy for the identification and mitigation of this type of risk.
The most simplistic form of risk mitigation is buying investments at a discount to their intrinsic value. This creates a buffer, or what Warren Buffett calls his margin for safety – imagine you’re driving a 10 tonne truck over a bridge, you want the bridge to be rated to 20 tonne.
This is commonly referred to as value investing. Whether by design or coincidence, each of the super investors reviewed are proponents of value investing.
Do your own work — maintain consistency
The next common characteristic is the simplicity of their investment philosophy and the disciplined application of their process over time.
They advocate for the power of independent thinking and doing their own work. Despite each investor having periods of underperformance in their long and storied careers, they apply their process consistently and do not deviate, even during periods of duress.
Some investors will go to great lengths to create the optimal environment to allow them to consistently apply their investment process. Author of "The Education of a Value Investor", Guy Spier, understands the impact the environment has on objectivity and he seeks to use this to his advantage. As a consequence, he has moved to Zurich, outside the financial market epicentres to foster a greater sense of purpose and discipline.
Stay rational — combating psychological bias
We are all influenced by psychological factors that inhibit our ability to make rational and reasoned decisions. Unfortunately, being aware of these biases does not negate their impact, but it can limit their impact over time.
Many super investors understand these biases and seek to limit their impact on investment decisions. Howard Marks believes that the largest investment errors do not stem from informational or analytical errors, but from psychological bias.
This was also considered in Peter Bevelin’s book about Charlie Munger, the irreverent partner of Warren Buffett at Berkshire Hathaway. Munger advises us to understand the quirks in our mental wiring in the hope we can take appropriate precautions.
Make it count — the power of concentration
Concentrated investing occurs when a manager allocates a large proportion of his fund to each investment. Concentration can enhance your performance, but you need to know your stocks better than the market!
If you know your stocks better than the market, then it doesn’t make sense to spread your bets across 40 or 50 businesses. This explains why most investment managers fail to beat their benchmark over time. It is exceptionally hard for a 2% position to provide any meaningful contribution to performance over the long haul. If a stock doubles it only adds 2% to performance.
Successful investors unleash their conviction and make it count. Many super investors don’t just believe in concentration, they specialise in it.
As Joel Greenblatt concludes, holding all your eggs in the one basket makes sense, so long as you watch that basket.
Invest with the pig— alignment of interest
A pig and a chicken are walking down the road.
The chicken says: "Hey pig, I was thinking we should open a restaurant!"
Pig replies: "Hm, maybe, what would we call it?"
The chicken responds: "How about 'ham-n-eggs'?"
The pig thinks for a moment and says: "No thanks. I'd be committed, but you'd only be involved."
You want to invest in managers who are committed, not just involved. And while most investment managers gladly tell you they are invested, the truth is, they are invested like the chicken.
The successful investor goes with the pig. Choose a manager committed to the cause who backs it up with their hard earned money. Seth Klarman described how engineers in ancient Rome were made to stand under their newly erected arches as scaffolding was removed. You want your fund manager standing under those arches. To those engineers, the quality of their work was intensely personal, which is perhaps why so many Roman arches still stand today.
These common themes from some of the greatest investors of all time provide a clear focus for successful investors. Avoid the losers, do your own work, stay rational, make it count and invest with the pig.
Full reviews on my top ten investing books of all time
If you missed it, in May I ran a series of ten wires, with each providing a summary of one of my top ten investing books of all time. You can access the series here.
Love the analogy of the pig and the chicken...
Perhaps wishful thinking - can we apply the 'Roman arches' lesson to CEO's?
Hi Damien. I think we could. We need our politicians to create a law that the company (acting on behalf of its shareholders) can claw back any entitlements i.e. salary or bonus, for unscrupulous behaviour. I think that would produce a positive change.