When it comes to building a portfolio that exceeds expectations, we think that everyone could benefit from taking a look at the lessons we can learn from great investors.
Rather than copy what investors have done, we recommend applying their principles to your life, taking into account the amount of risk you want to take, and the profit goals you want to achieve.
We recommend following billionaire investor Jim Rogers’ advice, to only invest in things you understand. So, while at some point you might be comparing, say, gold to real estate and stocks, you should stick with what you have at least a basic knowledge of.
1. Invest Long-Term
Unlike day trading, where short-term gain is the goal, reaping significant rewards typically comes from long-term investing.
Consider: When Amazon first went public in May 1997, shares cost $18. Since then, shares have undergone three stock splits (between 1997 and 1999). If you had purchased just ten shares when Amazon first went public (for a total cost of $180), your shares would be worth over $230,000 today.
Yes, Amazon is an exceptional story, but there are lessons to be gleaned from this company. The value of a share issued during its IPO has skyrocketed, but it didn’t do so overnight. Rather, it took 25 years. People would do the best investing for the long-term, letting their holdings ride out any blips in value.
In Amazon’s case, the company has seen steady growth most years, but there was a major decline in value around 2005, and most of the value seen today was gained after twenty years of existence.
2. Verify Your Hunches
Legendary stock trader Jesse Livermore argued that, no matter how much you think you know, you must let the market verify your hunches. Only then, should you make any moves (but when you do, move quickly).
3. Evaluate Prices as Fair or Not Fair — Not Good or Bad
As the world’s most successful investor in history, there’s a lot you can learn from Warren Buffet.
One of his most well-known teachings is summarized in the following adage: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
There are two things to take away from this quotation. First, the company itself matters more than whether the price is good or not. Second, when determining whether you should purchase shares, you should consider the price in terms of how fair it is, not how good it is based on other metrics.
So, how do you evaluate a company? First, understand its quality by looking at balance sheets and understanding its management team and its practices. Second, evaluate the price based on your findings.
4. Be Frugal and Pinch Your Pennies
Jack Bogel, the founder of the Vanguard Group (known for its low-cost mutual funds) has flown first-class only once, and only because he got the upgrade for just $50. Despite having deep pockets, Bogel pinched pennies.
You can see this approach in the way that many of Vanguard’s mutual funds are structured. Many charge less than 0.2% per year, while equity funds (on average) charge more than 1%.
5. Buy High and Sell Higher
You’ll often hear the phrase, “buy low, sell high,” but investor Dennis Gartman argues that what you should do instead is buy high and sell higher. This is because Gartman argues that you can’t know when a price is low, nor can you know when a price is high.
As such, you want to buy into opportunities when they present themselves. Try to identify strengths and flaws in a company rather than whether a price is low or high.
6. Buy Assets Trading Below Their Intrinsic Value
Buying assets that are currently trading below their intrinsic (or book) value was a principle frequently espoused by the father of value investing, Benjamin Graham, who eventually became a mentor to Warren Buffet.
Graham argued that the markets tend to overreact in both directions, leading to prices that don’t necessarily reflect how sound the company’s financial fundamentals are.
By identifying those that are undervalued and underestimated, you stand to increase your profit potential.
7. Be Humble
Investor Bill Gross maintains a humble attitude despite his successes; overconfidence (and its opposite, underconfidence) can be detrimental to making the best decisions and taking the best course of action.
Furthermore, humility allows you to admit when things have gone horribly wrong. Doing so is the first step toward learning from your mistakes and improving in the future.
8. Be Patient
One of the things you’ll notice when reviewing Carl Icahn’s portfolio is that he’s been patient for a long time.
Being inpatient and acting impulsively can lead to poor decision making, but that doesn’t mean there isn’t room for decisive action. Rather, be patient, and when the right opportunity comes along, act accordingly.
9. Big Winners Overwhelm Losers
According to Peter Lynch, you only need a couple of great investments in your lifetime. These big winners will more than offset all of your losses.
10. Learn from the Past
Lots of investors say that they learn from their mistakes, and John Neff is no different. Neff, who is one of the most successful investors in the world, credits the success of his Windsor Fund. He said that investors needed to be students of history without being a captive of it:
At least a portion of Windsor’s critical edge amounted to nothing more mysterious than remembering lessons of the past and how they tend to repeat themselves.
11. Invest in a Company During Its Early Stages
Thomas Rowe Price Jr, who would start the company known today as T Rowe Price, argues that the best time to begin investing in a company is during its early growth stages.
This is an integral pillar of his Growth Stock Philosophy. Early investment, however, requires that you do fundamental research, including interviewing a company’s management before purchasing the company’s stock.
12. Make Money During Downturns
Carlos Slim Helu is one of the richest men in the world, and he made a sizable portion of his fortune during one of Mexico’s hardest economic recessions. You can follow a similar principle by identifying healthy companies.
Because all companies are likely to be negatively affected, focusing on the price may not be supremely helpful when identifying such companies. These otherwise healthy companies will likely be undervalued as every economic participant maintains a negative outlook.
13. You Can Focus on the Short-Run
Many of the investors we’ve featured focused on the long run, but George Soros differs in that he focuses on short-term speculation. If you’re comfortable taking a big picture, macroeconomic look, you can make bets on the movement of various assets, including currencies.
There’s an element of reflexivity in Soros’ investments, and if you prefer to make short-term bets, learning from Soros’ investment philosophies might help you succeed.
14. Learn, Learn, and Learn Some More
When you look at John Templeton’s Sixteen Rules for Investment Success, you’ll see several common themes. One of them is that you should always be learning to maximize your success and profits from investing in the markets.
According to Templeton, those who aren’t curious or think they have the answers to everything will only meet failure when it comes to investment.
The markets are constantly changing, and there are always new things to learn to make sure that your portfolio is as good as it can be. This requires a fair amount of homework on your part, but it’s best to put in the work ahead of time to prevent future losses.
When you make mistakes, however, learn from them — don’t just keep making the same mistakes over and over again.
Summary
Everyone who participates in the stock market starts with a different budget and has different goals and risk tolerances.
As such, it can be a bad idea to copy others’ portfolios, even if that person is a highly successful investor. That doesn’t mean that there’s nothing for you to learn from these investors. We recommend listening to the principles they espouse to make sure that you work toward your own goals, not other people’s.
