Key takeaways from The Winning Investment Habits of Warren Buffett &George Soros

I recently finished reading the book The Winning Investment Habits of Warren Buffett & George Soros by Mark Tier. This book is author's attempt to discover the winning investment habits of successful investors regardless of whether they deal in shares, currencies, real estate or something else. This post is a summary of the key takeaways that I took from the book (in no particular order).

A penny saved is a penny earned 
  • Live below your means
  • Build a long term future-oriented attitude towards money. Learn to look at a every penny or dollar for not what it is worth today, but what it can become. A simple saving of $500 dollar per month, compounded over 10 years at an above inflation rate of 6% (historical stock market return) becomes an amazing total of $90,000. 
  • Minimise trading cost
  • Minimise tax
  • Avoid consumer debt at all cost. Albert Einstein called compound interest the eight wonder of the world. Remember, if compound interest isn't working for you, it's working against you!
Trying to time or predict markets next move is a losers game.  
Unfortunately, believing that somebody else can predict the market is also a a losers game. History tells us that markets will move up and down. Economy will go through cycle of boom and bust. There is little value in fretting about something that you have no control over.

There are no shortcuts to building wealth
Stop looking for the magic formula or silver bullet. Saving money and building wealth requires continuous learning, hard work, perseverance, patience (time in the market) and nerves of steel.

Focus on minimising risk 
 "Rule no. 1: Don't lose money, Rule no. 2: Don't forget rule no. 1" - Warren Buffett
In other words, focus on preservation of capital. If you lose 50% of your capital, then at a CAGR of 12% it would take approximately six years to make it back and four years at a CAGR of 20%. Bear in mind, these figures are before taking into account the time-value of money.

Conventional wisdom says that in order to achieve high-returns, you have to take high-risk. This is not true. A far better strategy is one which is built around low-risk high-return investments. There are various approaches you can take to minimise risk.

  • Knowledge: Risk is related to knowledge, understanding, experience and competence. This approach requires a laser focus to build expertise in a particular industry and/or company. The idea is to understand the ins and outs of each & every investment throughly. As a result, investors who practise this strategy happen to run fairly concentrated portfolios and develop their niche (circle of competence). E.g. Philip Fisher, Warren Buffett and Charlie Munger.
  • Actively managing risk: This approach requires an investor to continuously monitor the market and use mechanical techniques like stop-losses to actively manage risk.
  • Actuarial: This approach requires an investor to focus on positive average profit expectancy (win ratio) as opposed to the gains and loss of each and every investment investment. 
  • Diversification: While it is true that Warren Buffet runs a very concentrated portfolio, this does not mean diversification provides no value. The less the expertise you hold, the more value diversification provides. 
  • A combination of the above
Identify which market theory relates to you
There are various theories/models that try to explain the nature of the market, i.e. what is it that makes prices of assets go up and down. Some of the most prominent ones are:
  • Efficient market hypothesis
  • Random Walk hypothesis 
  • Mr Market: If you happen to fall in this camp and believe the Mr Market will sometime quote a price that is ridiculously high (overvalued) or insanely cheap (undervalued), it is imperative to identify fair-price (value). Phillip Fisher and Ben Graham were both value investors but, there definition of "value" was polar opposite to each other. What is your definition of value and thereby undervalued security? A stock that can be bought for less than its book value? Or a stock that can be bought for less than its intrinsic value i.e. present value of its future cash-flow.  
  • Theory of reflexivity (Beliefs alter facts) by George Soros
Every single one of these theories have their advantages and flaws. This is to be expected as they are simplification/generalisation of the complex real world. It doesn't matter which philosophical camp you belongs to, what matters is whether your chosen investment strategy is aligned with your beliefs about the market. My beliefs about the nature of the market is dominated by EMH and Random Walk hypothesis. This is not to say that I believe that market prices are always rational/efficient. However, I do believe that it is extremely difficult for an individual investor to identify and exploit such inefficiencies. Hence, my investing strategy is to invest in index funds.

Importance of a well thought out investment strategy (criteria)
  • A well thought out investment strategy eliminates (or at least significantly reduces) the role of emotions in investment decisions.
  • A well thought out investment strategy should be aligned with the investor's personality.
  • You should realise that anything can and will happen in the market. List all of the worst-case and best-case scenarios that can happen to the best of your knowledge. Focus on what is under your control. How would you react if some of the worst case scenarios came to fruition?
  • Your exit strategy should not be an after-thought but should be predetermined before or at the time of buy decision. Having a predetermined exit strategy takes the emotion out of selling. 
  • It is worth exploring successful (different) strategies of some of the worlds greatest investors.
The below table summarises 12 critical elements of an investment criteria
Investment Criteria Buffett Measures:
Quality of business
Soros Measures:
Quality of hypothesis
My Measures:
Economic wealth of a US corporations
What to buy All or parts of business that he understands - and that meets his criteria Assets that will change in price if his hypothesis is valid Low cost Index fund representing total stock market (US)
When to buy it When the price is right At the right time - which he determines by testing his hypothesis Twice a year at fixed interval
What price to pay A price that gives him margin of safety (i.e. a discount to the business's estimated value) The current (market) price The current (market) price

How to buy it Pay cash Futures, forward contracts, margin, with borrowed money Pay cash
How much to buy as a percentage of portfolio As much as he can
Limits: How much cash he has available, how much stock is on the market - and for how long is it available at the right price
As much as he can

As much as I can based on available cash

Monitoring progress of investments Does the business still meet his criteria? Is the hypothesis still valid? Is it progressing as expected? Has it run its course Index fund does it for me by re-balancing my portfolio every 3 months
When to sell When the business no longer meets his  criteria When hypothesis as run its course; or is no longer valid Never (expect during retirement)
Portfolio stucture and leverage No target structure.
Leverage only through insurance float, or borrowing when interest rates are low
The base is stocks, fully owned, which becomes security for leverage

100% invested in stocks (No bonds, gold or any other asset class)

No margin lending. Leverage only through equity when the portfolio is down by more than 10% on an annual basis

Leverage amount is twice the percentage of loss on the total stock market index on annual basis
Search strategy Read a lot Monitors political, economic, industry, currency, interest rate and other trends. Looks for linkages between disparate, unfolding events Cheapest, low-cost index fund/ETF
Protection against systemic shocks like market crashes Only buys quality businesses he understsnds at a price that gives him substantial margin of safety Beats a hasty retreat Stay the course

Handling mistakes Gets out
Admits, accepts and analyses mistakes to avoid repeating them
Counts opportunity cost as mistakes too
Gets the hell out

Has a detailed strategy for analysing mistakes so he doesn't make the same mistake again
Admit, accept and analyses mistakes to avoid repeating them

What to do when the system doesn't work Stops (closed partnership in 1969);
seeks flaw in method (e.g. adopting Fisher's methodology)

Continously reviews system to see if it can be improved

Continously reviews system to see if it can be improved
Continuously invest in knowledge to see if it can be improved

Think independently
You have to think for yourself. You have to conduct your own research thoroughly and ignore the market noise or the opinions of the so called "experts".

Continuous learning 
  • Learn to avoid obvious big mistakes. As Charlie Munger puts it, "What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead – through sloth, envy, resentment, self-pity, entitlement, all the mental habits of self-defeat. Avoid these qualities and you will succeed. Tell me where I’m going to die, that is, so I don’t go there."
  • Never ever ever stop learning. Persistence, determination and voracious appetite for learning will take you a long way in achieving success.
  • When you make a mistake, look inwards and accept responsibility. Do not blame others.
The book also provides a rich collection of  examples that explain the investment strategy of Warren Buffett, George Soros, Carl Icahn, Harry Browne and John Templeton.

Like always would love to hear thoughts /opinion from my readers.

Full Disclaimer: I am not a financial planner. The views expressed in this post are all mine and they may or may not suit your needs. Please do you own due diligence. I do not make money on any of the products suggested in this post.

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