INTRODUCTION: Can you really make more money by just sitting on your butt?
7 Contrarian Investment “Tips” From the World’s Richest Investors
How To Make More Money By Sitting on Your Butt
A Good Story—but a Good Investment?
Your Profit is “Virtually” Guaranteed
Using Scuttlebutt to Maximize Your Profits
Contrary to “Contrary Opinion”
Why Diversification is one of the Seven Deadly Investment Sins
The Accountant’s Investment Edge
What’s Your Investment Style?
About the Author
Preview The Winning Investment Habits of Warren Buffett & George Soros
p. Chapter 1: The Power of Mental Habits
p(((. Why Johnny Can’t Spell
The Structure of Mental Habits
Chapter 2: The Seven Deadly Investment Sins
Chapter 4: George Soros Doesn’t Take Risk?
p(((. Risk is Contextual
The Four Stages of Learning
Risk is Measurable
What Are You Measuring?
Risk is Manageable
1. Don’t Invest
2. Reduce Risk
3. Actively Managing Risk
Beating a Hasty Retreat
“I Am Fallible”
4. Manage Risk Actuarially
Gambling, Investing, and Risk
Risk versus Reward
Chapter 26: Do You Need to be a Genius?
Chapter 31: It’s Easier Than You Think
Other Titles by Mark Tier
[How to Make More Money
By Sitting on Your Butt]
[and other contrarian
conclusions from a lifetime
in the markets]
You bet you can.
Indeed, if you’re not a “butt-sitting” investor some of the time, you’ve increased your chances of losing money in the markets.
Get your copy here.
As legendary trader Jesse Livermore put it: “It was never my thinking that made the big money for me, it always was sitting.”
And George Soros: “When there’s nothing to do, do nothing.”
And Warren Buffett spends most of his time “sitting on his butt”—reading annual reports.
This is just one of the many contrarian conclusions I’ve come to in the 42 years I’ve been in the investment marketplace. The following “pages” of this ebook cover ten different topics. And you can find others at my website, marktier.com.
Most of these conclusions I’ve come to the hard way: by losing money or missing out on a slam dunk opportunity.
All in all, an expensive, but ultimately profitable, education.
Let’s begin with 7 contrarian investment “tips” from the world’s greatest investors . . .
What great investors do that average investors don’t
Warren Buffett and George Soros are the world’s richest investors. Their investment styles are as opposite as night and day. Buffett buys companies that he considers to be good bargains; Soros is famous for his speculative forays into the currency markets, which is how he came to be known as “The Man Who Broke the Bank of England.”
But—as I have detailed in The Winning Investments Habits of Warren Buffett & George Soros—they both practice the same 23 mental habits and strategies religiously. As do Carl Icahn, Sir John Templeton, Bernard Baruch, and all the other successful investors I’ve ever studied or worked. It doesn’t matter whether you buy stocks, short currencies, trade commodities, invest in real estate, or collect ancient manuscripts: adding these mental strategies to your investment armory will do wonders for your bank account.
To make it easy to get going, I’ve distilled these 23 mental habits into these seven simple (though not always easy to follow) rules:
1. If you’re not certain about what you’re intending to do, don’t do it. Great investors are always certain about what they are doing whenever they put money on the table. If they think something is interesting but they’re not sure about it, they do more research—or just take a walk.
So next time, before you call you broker (or go online), ask yourself: “on a scale of 1 to 10, how certain am I that I will make money?” Choose your own cut off point, but if it’s less than a 7 or an 8, you definitely need to spend more mental energy before making a commitment.
A cold shower might be even a better “investment.”
Remember: the great investor’s sense of certainty comes from his own experience and research. If your sense of “certainty” doesn’t come from your own research, it’s probably a chimera.
2. Never take big risks.You probably heard that the only way to make big profits in the market is to take big risks. It’s simply not true.
Warren Buffett, George Soros, Peter Lynch . . . they only invest when they are confident the risk of loss is very slight.
Okay, what about that person you heard about who made a bundle of money in copper or pork belly futures or whatever by taking on enormous leverage and risk?
A few simple questions:
If not, chances are that’s the only big profit he ever made.
The great investors make money year in year out. And they do it by avoiding risk like the plague.
3. Only ever buy bargains. This is another trait the great investors have in common: they’re like supermarket shoppers loading up on sale items at 50% off.
Of course, the stock exchange doesn’t advertise when a company’s on sale. What’s more, if everybody thinks something is a bargain, the chances are it’s not (or if it is, it won’t be for very long!).
That’s how Benjamin Graham, author of the classic The Intelligent Investor , averaged 17% a year over several decades of investing. He scoured the stock market for what he considered to be bargains—companies selling under their break-up value—and bought nothing else.
Likewise, Warren Buffett. But his definition of a bargain is very different from Graham’s: he will only buy companies he can get at a discount to what he calls “intrinsic value”: the discounted present value of the company’s future earnings. They’re harder to identify than Graham-style bargains. But Buffett did better than Graham: 23.4% a year.
Even George Soros, when he shorted sterling in 1992, was convinced that the pound was so overvalued that there was only one way it could go: down. That’s a bargain of a different kind, but a bargain nonetheless.
4. Do your own leg-work. How do they find investment bargains? Not in the daily paper: they might occasionally find a good investment idea there, but not any true bargains.
The simple answer to “How do they do it?” is: on their own. After all, almost by definition, an investment is only a bargain if hardly anybody knows about it. As soon as the big players discover it, the price goes up.
So it takes time and energy to find an investment bargain. As a result, all the great investors specialize. They have different styles, they have different methods, and they look for different things. That’s what they spend most of their time doing: searching, not buying.
So the only way you’re going to find bargains in the market is the same way: by doing your own legwork.
5. “When there’s nothing to do, do nothing.” A mistake many investors make is to think that if they’re doing nothing, they’re not investing.
Nothing could be further from the truth. Every great investor specializes in a very few kinds of investments. As a result, there will always be stretches of time when he can’t find anything he wants to buy.
For example, a friend of mine specializes in real estate. His rule is to only buy something when he can net 1% per month. So sometimes he’ll sit on his thumbs for years—aside from collecting the rent!
Is he tempted to do something different? Absolutely not. He’s made money for decades, sticking to his knitting, and every time he tried something different, he lost money. So he stopped.
6. If you don’t know when you’re going to sell, don’t buy. This is another rule all great investors follow. It’s a major cause of their success.
Think about it. You buy something because you think you are going to make a profit. You spend a lot of time so you feel sure you will. Now you own it. It drops in price.
What are you going to do?
If you haven’t thought about this in advance, there is a good chance you will panic or procrastinate while the price collapses.
Or . . . what if it goes up—doubles or triples—what are you going to do? I’ll bet you’ve taken a profit many times only to see the stock continue to soar. How can you know, in advance, when it’s likely to be the right time to take a profit? Only by considering all the possibilities.
The great investors all have; and will never make an investment without first having a detailed exit strategy. Follow their lead, and your investment returns should soar.
[*7. Benchmark yourself. *]It’s tough to beat the market. Most fund managers don’t, on average, over time.
If you’re not doing better than an index fund, then you’re not getting paid for the time and energy you’ve spent studying the markets. Much better to put your money in such a fund and spend your time looking for that handful of investments you are so positive are such great bargains that you’re all but guaranteed to beat the market.
Alternatively, consider the advice from a great trader. When asked what the average trader should do, he replied: “The average trader should find a great trader to do his trading for him, and then go do something he really loves to do.”
Exactly the same advice applies to the average investor.
Way back in 1975 Ray, one of my newsletter subscribers, called me, all excited.
“I’ve never made so much money in my life!” he told me.
I knew Ray was a farmer. And while commodity prices had gone up, they hadn’t gone up that much. So I wondered what on earth he had done.
“That’s the amazing thing,” he said. “Nothing!
“I sold the farm, put everything in a time deposit—and I’m getting 11.3% by just sitting on my butt!
“More money than I’ve ever made in 30-odd years of busting a gut on the farm, come rain, hail, or shine.”
In the late 1970s and ’80s, as you may recall, interest rates world-wide were sky high. In the US, the 10-year Treasury bond paid 10% or more from 1980 to 1985, peaking at 15.32% in January 1981.
In some other countries, rates were even higher. Like Australia, where Ray comes from: interest rates kept rising till 1989, when they peaked at 18.9%!
Today, the era of 10%+ interest rates are long gone.
Nevertheless, I’m going to show you how you can apply the “sitting on your butt” strategy to make more money more easily that you ever thought possible—even when interest rates are 2%—or lower!
First, we need to address a couple of seemingly contrarian concepts—entrees, so to speak, before getting to the chateaubriand.
When Making a Profit Just Isn’t Enough
How do you measure your success as an entrepreneur or investor?
The key, surely, is whether you’re making a profit.
Banking a profit certainly means you’re not failing.
But in business or investing not failing doesn’t necessarily mean you’re succeeding.
Sound paradoxical? Not really.
For example, too many small businessmen usually work long hours and judge their monetary success on whether they’re making a reasonably good income.
But that “income” is really made up of three, very different components.
1. The salary you would have to pay someone to run the business for you; and/or,
2. The market salary the owner should receive for the number of hours he has to put in; and,
3. The operating profit (or loss) after those not-so-notional expenses have been deducted.
For example, say you’ve invested $1,000,000 in your business.
The business is successful in the sense that you’re clearing, say, $12,000 a month.
Pretty good income, right?
But—you’re putting in 10-12 hours a day, five (or more) days a week to run that business—as the manager.
The median annual salary for a business manager is around $60,000 per year. Or about $30 an hour (for an 8-hour day, 5 days a week).
To calculate your true return on capital, you need to deduct that notional salary.
At $30 an hour, 11 hours a day, 5 days a week, comes to $7,150 per month. That leaves a monthly nett from the $12,000 operating profit of $4,850 a month, or $58,200 a year.
Doesn’t sound too bad. Until you realize that’s a mere 5.8% return on your million-dollar investment.
An alternative (in the box) produces a return of 6.21%.
If you’ve routinized the business you could hire lower paid workers to run it at around $15 an hour. You’d then only need to put in a couple of hours a day supervising, going the bank, and so on.
Here’s how that would look:
|Annual wage bill||$60,060||$21,840||$81,900|
|Operating profit (before wages)||$144,000|
|Profit after wages||$62,100|
|Return on $1,000,000 capital||6.21%|
Better. But enough?
Not if you can get a similar return by sitting on your butt.
“Opportunity Cost”: Could You Make More Profitable Use of Your Time and Money?
When you spend a dollar, your “opportunity cost” is whatever you could have bought instead—but now can’t.
A friend of mine used this concept to teach his son about money (like me, he also has a degree in economics, the source of the concept of “opportunity cost.” Have to use it somehow!)
Every day the ice cream truck came by. His son’s favorite ice cream was 75 cents. An alternative was just 35 cents.
Dad gave him 50 cents pocket money a day. His son had to now choose: save up for his favorite—but have it tomorrow. Or give into his desire for “instant gratification” and buy the cheaper one now—foregoing the possibility of having his favorite the next day.
Similarly, if you’ve invested $1,000,000 in a business, you’re foregoing everything else you could have done with that money. Not to mention what you could have achieved with all that time you’re putting in.
To calculate your opportunity cost, let’s assume that the stock market’s average, long-term return is 9%-11%.
If you’d put that $1,000,000 in an index fund instead, it would produce a lumpy average of around $100,000 a year—while you’re just sitting on your butt.
Then, instead of putting in 11 hours a day (and spending the rest of the week worrying about the business) you could take a job in a company somewhere as a manager at $30 (or more!) per hour, work a 5-day week—and go the pub at 5pm with an unworried and uncluttered mind.
You’d clear around $60,000(+) per year, with annual and sick leave thrown in (right?).
Total (average) annual return: $100,000 + $60,000 = $160,000.
More than the $144,000 the business produces when you put in 11 hour days.
But What About the Sense of Achievement and Fun You Get from Running Your Own Business?
“I’m having so much fun running my business,” you might respond, “the last thing I want to do is work for someone else.”
I’m with you on that. My last job ended May 1, 1970. Today, I figure I’m totally unemployable. Every day I do stuff for fun when I could make more money doing something else.
So I’m certainly not suggesting you exchange your passion for profits.
And having fun is just one of many possible returns on your investment of time and money. For example: the mouthwatering profits you expect to make when the business really takes off.
Not to mention that big payday when you go public, or some giant conglomerate comes knocking on your door.
What is important is that you know the “opportunity cost” you’re paying: what you’re foregoing.
Especially as there are plenty of other activities which aren’t so much fun, where figuring out your opportunity cost will lead you to making more money more easily than you ever have before.
Next Question: should you devote any of your precious time to investing?
Well, that’s your call. But let me show you how opportunity cost might factor into your thinking.
Just like running a business, successful investing requires that you invest your time as well as your money to achieve results. So are you getting a better return on that time and money by investing than you could by doing something else?
To figure that out, we must first establish a “butt-sitting” benchmark so we can measure the opportunity cost of your time and money.
Eight “Sitting on Your Butt” Investments
|Type||Annual return(as of June 2016)|
|1. A savings account||0.03%-0.06%|
|2. Time deposits||0.03% to 0.15%|
|3. Long term government bonds||2.48% (30-year Treasury bond)|
|4. Corporate bonds||3.17% (20-year AAA)|
|5. Dividend-paying stocks||2.10% (S&P 500 dividend yield)|
|6. An index fund that tracks the market||Around 7% per annum (10 year average)|
|7. The “Permanent Portfolio”|
Developed by Harry Browne, his “permanent portfolio” is divided into four equal parts: cash (at interest), long-term government bonds, gold, and high-beta stocks.
Once a year, the portfolio is typically adjusted back to 25/25/25/25.
8. The Millionaire Teacher
Could you become a millionaire on a teacher’s salary?
Andrew Hallam did, and explains how in his book, Millionaire Teacher.
Hallam divided his savings into two parts. One part in an index fund. The other in bonds. The ratio is age-dependent: at 30, he had 30% in bonds; at 55, 55% in bonds. Adjusted once per year.
Following this strategy, and adding money to his investments every year, turned him into a millionaire.
Time required to manage either of these last two strategies: less than one day per year.
Beating the Benchmark
Figuring out whether you’re beating your chosen benchmark is relatively straightforward. “Relatively,” because there are so many variables.
Let’s take a simple, hypothetical example first to see how it works.
First choose a “butt-sitting” strategy from one of the 8 options above. To keep the maths simple, let’s assume a 5% return on your portfolio.
The second assumption: by spending 5 hours a week analyzing the markets, you could triple that return to 15%.
Based on those assumptions, for every $100,000 you have to invest, you’d conceivably make an extra $10,000 a year. Or a touch over $40 for each hour of time you spend on analyzing the market.
Is that the most profitable use of your time?
If you’re earning $25 an hour, the return on your time is $15 an hour higher in the markets.
But if you’re a lawyer or other professional who can bill $100 (or more!) an hour, clearly it’s more profitable put in that extra hour a day in the office.
The numbers change if your portfolio is larger. If that same lawyer has a million dollar portfolio instead of $100,000, those extra 5 hours a week could add $100,000 a year to his net worth. A return of over $400 an hour.
As you can see, there are quite a few variables. So here’s a table that lays them out for two different investment portfolio sizes ($100,000 and $1 million) and two different salary rates ($25 and $100 per hour), with the same assumption that investing 5 hours of your time a week can produce a 15% return in the markets:
|1. $100,000 portfolio; $25 hourly salary|
|Benchmark annual return (per year)||$1,500||$2,500||$3,000||$4,000||$5,000||$7,000||$10,000|
|Difference @ 15%||$13,500||$12,500||$12,000||$11,000||$10,000||$8,000||$5,000|
|Return on time (per hour)||$56.25||$52.08||$50.00||$45.83||$41.67||$33.33||$20.83|
|Per hour difference||$31.25||$27.08||$25.00||$20.83||$16.67||$8.33||-$4.17|
|Benchmark annual return (per year)||$1,500||$2,500||$3,000||$4,000||$5,000||$7,000||$10,000|
|Difference @ 15%||$13,500||$12,500||$12,000||$11,000||$10,000||$8,000||$5,000|
|Return on time (per hour)||$56.25||$52.08||$50.00||$45.83||$41.67||$33.33||$20.83|
|Per hour difference||-$43.75||-$47.92||-$50.00||-$54.17||-$58.33||-$66.67||-$79.17|
|Benchmark annual return (per year)||$15,000||$25,000||$30,000||$40,000||$50,000||$70,000||$100,000|
|Difference @ 15%||$135,000||$125,000||$120,000||$110,000||$100,000||$80,000||$50,000|
|Return on time (per hour)||$562.50||$520.83||$500.00||$458.33||$416.67||$333.33||$208.33|
|Per hour difference||$537.50||$495.83||$475.00||$433.33||$391.67||$308.33||$183.33|
|Benchmark annual return (per year)||$15,000||$25,000||$30,000||$40,000||$50,000||$70,000||$100,000|
|Difference @ 15%||$135,000||$125,000||$120,000||$110,000||$100,000||$80,000||$50,000|
|Return on time (per hour)||$562.50||$520.83||$500.00||$458.33||$416.67||$333.33||$208.33|
|Per hour difference||$462.50||$420.83||$400.00||$358.33||$316.67||$233.33||$108.33|
As you can see, the higher your salary, the more likely the best return will come from adding an extra hour to your day job.
Comparing your current financial returns to “sitting on your butt” is an important aid to making more money more easily.
So before you embark on any moneymaking endeavor that sucks up either your time or money, consider the alternatives. You might find that the better option is to pour yourself a glass of something interesting and sit back on your butt.
Excited about a stock? It pays to remember Warren Buffett’s Investing Rule #1: “Never Lose Money”
What makes investors pile into a stock?
The answer to this question was of great concern to a Vancouver stock promoter I met many years ago. After all, that was his business: harnessing investors’ greed to sell out his stake in a new company at a juicy profit to himself.
He’d noticed that some newly-listed companies took off, while others with pretty much the same balance sheet and profit and loss statement stagnated or even fell.
By analyzing pairs of such companies, he discovered that the difference that made the difference was the story. The company with the sexy sizzle was the one that caught the attention of the media, that got brokers and investors hot under their collars and excited enough to open their wallets.
When he promoted companies like this—even when they had more story than substance—he could bank a handsome profit.
The boring stodgy company—that made bricks, or industrial parts no one had ever heard of—was the one that went nowhere. Even when it was the better investment.
If you pick up any issue of Forbes, Fortune, or any other business or investment magazine, you’ll find the same principle of “boosterism” at work. And I can’t resist using this story from Fortune magazine—published during the dot-com boom—to make the point. It begins:
The company that pioneered the trading of natural gas is applying its old paradigm to a newer type of commodity: Internet bandwidth.
The writer quotes several professionals. One said for this company to say “we can do bandwidth trading is like Babe Ruth’s saying, I can hit that pitcher. You tell him to get up there and take three swings. The risk is staggeringly low, and the potential reward is staggeringly high.” Another applauds its entry into a business she calls “very sleazy—a bunch of cowboys and carpetbaggers.”
Then—for a little balance—we hear from two competitors, both skeptical. But the second one adds: “I have no doubt those difficulties will be overcome.”
The article concludes by saying that this company . . .
has resources most dot-coms would die for. In today’s environment, where every well-funded tech whippersnapper looks like a genius, it’s tempting to root for a graybeard.
As you can gather from these brief excerpts, the entire article exuded great optimism about the future prospects of this company. You couldn’t help but believe they were on to a good thing. And the implication was that this new business would generate profits which would drive up the price of the stock.
What was the company? Well, the article came from the January 24, 2000 issue of Fortune. And was titled: “Enron Takes Its Pipeline to the Net.”
Enron! That’s right.
Just after that issue of Fortune came out, Enron raised its earnings estimates and the stock peaked at $81.39 per share. Eleven months later—December 2, 2000—the stock was 40 cents as the company filed for bankruptcy.
Perhaps you think I’m being unfair using this story as an example. And, I admit, it is extreme. But it’s not uncommon.
You see, business publications are primarily in the entertainment business. Yes, they contain information. A lot of it good. But their primary aim is to get you to renew your subscription. They achieve that, in part, by serving large dollops of exciting success stories about people and businesses that have made lots of money.
I challenge you to find an issue of business publication without such an article.
So next time a report gets you excited about a company, ask yourself: “That’s a good story—but would it make a good investment?”
Even in investing the old marketing adage applies: “sell the sizzle, not the steak.”
And sometimes there’s not even any steak.
How understanding investment marketing could save you a bundle of money
Ever read a pitch for some investment product with phrases like “your profit is virtually guaranteed,” or “you’re virtually certain to make money”?
“Virtually” is a great word. In fact, it’s my favorite investment marketing word.
Compare “virtually guaranteed” to, say, “almost guaranteed.” How interested would you be in an investment that’s almost certain to make you money?
Doesn’t have the same ring to it, does it? “Virtually” and “almost” have totally different “feels” about them, don’t they.
“Virtually guaranteed” has the sense of 99.99999 percent certainty. But if something’s only “almost guaranteed” it’s more like 50-50 or 60-40 . . . if you’re lucky.
Yet if you look up “virtually” in a dictionary, what does it mean? “Almost”!
The English language is rich with synonyms like these, all meaning “virtually” the same thing—but all feeling different.
One of the reasons advertising copywriters can make so much money is that they know how to use these synonyms to maximize the emotional impact of their ads. By the time you come to the end of a marketing pitch, if the build-up’s been good the words “ . . . and it’s virtually guaranteed to make money” slip into your mind as “ . . . and you’re guaranteed to make money.”
Yet has the copywriter told a lie? Of course not! He can simply pick up his dictionary and point out that “virtually” means “almost” or “not quite” . . . and everybody knows that something that’s only almost guaranteed has no guarantee at all.
[Notice how I slipped in the word “only” there? Bet it didn’t fully register. But adding that one word makes the sense of “almost” even more uncertain than it already is. And putting “almost” in italics “virtually guarantees” that your eye will seem to skip over the word “only” entirely. But the implication still sticks.]
Even “tell the truth” laws regulating advertisements don’t protect you.
Good marketing tells you the truth, and nothing but the truth.
But it never tells you the whole truth.
And if it’s really good marketing, the emotional impact of the whole can be a wild exaggeration—or even a lie—even though every single statement in the ad, taken by itself, is 100% (not virtually!) true.
So next time you read an ad ask yourself: “Well, that’s all very well and good—but what aren’t they telling me?”
Answering that one question could save you a bundle of money.
This is a powerful investment tool that requires one major “analytical” talent: the ability to listen
Probably the most underrated, and often the most rewarding way of testing an investment idea is called “scuttlebutt.”
If you haven’t come across this term before, it doesn’t mean scrounging around in garbage cans (though, come to think of it, that might occasionally be a good idea). It means talking to a number of different people who know something about a company so you can put the pieces together into a comprehensive picture.
Sometimes, it’s even easier than that.
For example, my first encounter with the “scuttlebutt” technique was with a Hong Kong company called Giordano.
Despite its Italian name, Giordano is a chain of clothing stores started in Hong Kong by a very interesting entrepreneur named Jimmy Lai. It sells well-made, fashionable clothes very cheaply.
But what intrigued me about this company was that every time I walked into one of its Hong Kong stores, the staff were cheerful, they welcomed you, they didn’t hassle you to buy something—but they were always there when you needed help.
While this probably doesn’t sound like anything out of the box, in Hong Kong in the 1980s to walk into a shop like this was to experience culture shock.
I mean that literally. Back then, a tourist could go into a camera store loaded with thousands of dollars he intended to spend on expensive gadgets and be met with complete indifference—or worse. Shop assistants in Hong Kong back then made New Yorkers seem like they’d all graduated from charm school—with honors.
My reaction was: Wow! If someone can get Hong Kong Chinese shop assistants to act like this, this company is probably a fantastic investment.
So I visited a number of other Giordano stores in Hong Kong, and the experience was exactly the same. I remember reading an article about Jimmy Lai at that time. Apparently, he had no particular interest in clothing or fashion. What he’d done was study successful businesses like McDonald’s to figure out how they operated; looked for an empty niche in the market; and created a superbly organized business to fill it.
The story was getting better and better.
Around that time, I travelled to the Philippines and Malaysia. Both these countries are renowned for their happy, smiling people who are always pleased to see you—and even delighted that you’ve come to visit their country. As it happened, Giordano had expanded into both these countries so naturally I wandered into their stores.
Imagine my surprise when, in both places, I was greeted with reactions varying between complete indifference and outright hostility for disturbing their siesta.
Something in the Giordano model had obviously gone wrong. Clearly, if they couldn’t motivate people who are naturally cheerful to be cheerful in their jobs, the investment prospects didn’t look so exciting after all.
Not investing in Giordano stock at that time, it turned out, was a very wise decision.
Philip Fisher and Scuttlebutt
Scuttlebutt was the key ingredient in the success of legendary investor Philip Fisher. There’s only so much you can learn about a company from reading its annual reports, he once said. To really get to know a company, you’ve got to get out and talk to people. Not just the company’s managers, but its employees, suppliers, retailers and customers. Often, the very best source of information will be the company’s competitors. After all, an executive is likely to give you a one-sided view of his own company, but he’ll happily tell you anything you want to know about his competitors. Another excellent source is ex-employees, who will no longer be restrained by any loyalties to their former employer.
In his book Common Stocks and Uncommon Profits (now considered an investment classic ranked with Benjamin Graham’s The Intelligent Investor) Fisher talks about the first time he used this approach to evaluate an investment. It was 1928, and radio stocks were hot. So he went and talked to buyers in several San Francisco department stores. They all agreed that Philco radio was the one that was flying off the shelves, while a company which was the darling of Wall Street sold a radio that customers didn’t really care much about.
Unfortunately for Fisher, Philco, which was the low-cost manufacturer, was privately-held so he couldn’t buy into it. But he was, nevertheless, gratified to watch the stock of the Wall Street favorite sink while the market went to new highs.
The “Thickburger” Turnaround
In early 2003—a more contemporary example—New York-based fund manager Whitney Tilson bought stock in a company called CKE Restaurants at $3.49 a share.
A key component of his decision to buy was “scuttlebutt,” and 18 months later, the stock was $14 a share—four times higher.
CKE Restaurants then owned the Carl’s Jr., Hardee’s and La Salsa fast food chains. Whitney was skeptical at first as the company had been in trouble and its brands were sliding in the market. But the management had a turnaround plan which impressed him. Given its financials and so on, the company would be a great buy—if the management’s plans paid off.
But would they? And more importantly: how to determine that before everybody else knew about it and the stock was no longer a bargain?
A critical piece of the turnaround plan was the introduction of a new menu in the Hardee’s restaurants. And central to that menu was the new “Thickburger,” made from Angus beef and selling at a premium price. It was tested in 80 restaurants, and when the test was successful rolled out across the Hardee’s chain.
Whitney and a fellow investor spoke to several franchisees, called more than 30 restaurants around the country, as well as visiting stores in different states. They found a consistent story throughout: staff were happier, customers were happier, and most importantly of all, same-store sales in the restaurants with the new menu were mostly up 30%-40%, year on year.
Convinced he was onto a winner he and his friend loaded up—and more than quadrupled their money. Such can be the power of scuttlebutt in digging up information directly from the market that you can be sure hardly anyone else knows about.
[You can read Whitney Tilson’s own, more detailed, commentary on this investment and his use of scuttlebutt in the column he wrote for the Motley Fool.]
“Call Your Dentist!”
One of my investment coaching clients was interested in a company that is Australia’s leading supplier of amalgam—the stuff dentists use to fill your teeth. Or at least, used to use. Nowadays, most dentists use that white filling material that is hardened with ultraviolet light. It’s been years since I’ve had a filling with amalgam.
Something my client wasn’t aware of as he hadn’t had a tooth filled in years.
So we talked about scuttlebutt and its uses, and at the end of the session I urged him, “Call your dentist.”
The next few weeks, every time we talked, I would say, “Have you called your dentist yet?”
Eventually, he reported that his dentist had told him: “Oh, I haven’t used that stuff for age. I don’t know anyone who does anymore.”
While there may have been other reasons for being interested in this company, what attracted my client’s attention was its near-monopoly of this niche market. But, clearly, a monopoly in a declining, soon-to-be-nonexistent market is not a recipe for a growth stock. So he lost interest.
Try Your Luck
While it may take more than a single phone call to someone you already know to get the inside skinny on a company, there are always more than one way to skin a cat. Make a list of the sorts of people linked to a company—suppliers, retailers, wholesalers, customers, employees and so on. Then ask yourself if you know anyone who fits into one of those categories—or if you know someone who might know someone who does.
Go to a trade show, go to a company annual meeting, or any other place where the people you would like to talk to are likely to be and try your luck.
Probably the easiest place to do this kind of research is at the retail level. Go into a shop as if you were going to buy something, and ask the sales person all sorts of questions—the obvious questions a customer would ask but make sure you slip in a few important questions like, “Well, which one is the best-selling brand?”
Feeling a little bit nervous about this approach? Pick some product in which you have absolutely no interest. And then go and talk to someone who sells it. If you’re not interested, you have no emotional involvement in the outcome, and will find it easier to walk out the door at any time.
The direct approach often works too. Like Philip Fisher, introduce yourself as an investor and explain why you’re there and what you want to know. Remember: people love to talk about what they know, and more often than not all they need is a willing audience.
When you’ve found the right person, there’s just one ability you need to use scuttlebutt successfully as an investment tool: the ability to listen.
How can you tell when one of your investments has just hit the jackpot?
Many years ago I met a guy who’d developed a backup battery to help cars start on cold mornings. Car batteries were nowhere as near as good then as they are now. He figured there’d be a great market in places like northern Europe, Canada and the northern United States where freezing winters often meant cars were hard to start on cold mornings.
The giant battery maker Eveready agreed. They offered him $500,000 for his invention.
Did you ever hear of such a battery? Of course not—because he turned down Eveready’s offer. Figured he’d make a lot more on his own . . . but he never got it off the ground.
A while later I introduced another friend of mine to a stock promoter I knew in Vancouver. My friend had just started a business, had one location in southern California, and planned to franchise it nationwide.
The stock promoter thought it was such a great idea he offered him $5 million on the spot for 50% of the business—with no “due diligence” whatsoever!
Well, to my friend this just confirmed the value of his idea. Positive he could make a lot more money than that, he decided to do it on his own.
Unfortunately, he was very good at starting businesses—but hopeless at developing and running them. A year later, he was bankrupt.
At the height of the dot-com boom, another businessman I know was offered $3 million for his company. Convinced it was worth a lot more, he—like my other two friends—turned the offer down.
Unfortunately, his business was in an industry that, ironically, was about to be “disintermediated” by the internet. Today, like the remnants of its previous competition, it’s a barely-surviving shell of its former self.
These are examples of what I call “windfall profits.” A windfall profit is like winning the lottery. Something completely out of the ordinary happens to drive up the price of your investment—but quickly evaporates if you don’t grab it immediately.
The question is, can you recognize them when they happen? My three friends couldn’t—and they’ve all regretted their decisions not to take the money many, many times since.
The trap is that you can interpret a sudden jump in the value of your investment as proof of all your expectations. After all, if your stock just doubled more or less overnight, surely this can only mean there’s more to come.
Maybe. How can you be certain? After all, the last thing you want to do is to take a profit just because it’s there—and then see it double or triple again.
To make the distinction you need to find out why your investment has zoomed up. If there’s been some dramatic improvement in the business—or if Wall Street has just recognized the value you saw in this company—then maybe there’s more to come.
But if the cause is some extraneous factor, then it’s probably time to take the money and run.
For example, during the late 1990s’ internet boom I owned shares in a company that rented out exhibition equipment . . . booths, signs, and all the other stuff you see at trade shows. I’d bought it because it was a solid, stable, and very boring business that was throwing off steady profits and juicy dividends.
One day I checked the price and noticed that it had gone from a dollar to around $2.50 per share. Unfortunately, a few days earlier it had been over $3.
I quickly found out that the reason for this jump was that the company had been talking—just talking!—to an American outfit about putting its business on the internet.
How could putting up a website suddenly double or triple the number of exhibition booths this company could rent out?
All that had happened was that the suckers caught up in the “sex appeal” of the internet boom suddenly piled into this stock.
So I called my broker and immediately dumped all my shares. A few months later they were trading at less than I’d originally paid for them. The saddest thing about these windfall profits is that they don’t happen very often. I wish I had more than one to talk about.
But I don’t.
But I’m certainly ready to grab the next one that comes my way . . . if it ever does. And I hope you will be, too.
If there are any shortcuts to wealth, the theory of contrary opinion isn’t one of them
The theory of contrary opinion is appealing. The idea that the average investor is usually wrong, operates more on emotion than reason, and often exhibits herd-like behavior is a compelling one with large elements of truth.
Another variation is that professional fund managers aim, primarily, to match each other’s performance, so collectively they behave like lemmings—the classic example of self-destructive herd behavior. (“After all,” as Warren Buffett put it, “no individual lemming ever got a bad press.”) As a result, they offer the perfect “crowd” to bet against.
Wall Street is a favorite whipping boy, so this idea is a staple of investment newsletter marketing, implying the writer has some superior source of information.
Like all myths, the idea of contrary opinion has an element of truth. Legendary investor Bernard Baruch, for example, sold all his stocks while the crowd was frantically buying, shortly before the market crashed in 1929.
In the bear market of 1973-74, Warren Buffett was scooping up shares in the Washington Post Co., paying 20 cents in the dollar, while Wall Street was uniformly of the opinion that the stock “could only go lower.”
Jimmy Rogers became famous—and rich—by buying stocks dirt cheap in places like Portugal, Botswana and Malaysia at a time when foreign investing to an American was buying mining stocks on the Vancouver stock exchange. Some 20 years earlier, John Templeton loaded up on stocks in Japan when all the “crowd” knew was that “made in Japan” meant cheap and shoddy.
Yes, great investors usually go against the crowd. They usually buy when others are selling, and sell when others are buying.
But is there any cause and effect relationship between their actions and what the crowd is doing? Do you think these great investors ever check out what the average investor is up to—so they can do the opposite?
When he was loading up on the Washington Post Co., do you think Warren Buffett—whose idea of a group decision is to look in the mirror—gave a damn about what Wall Street or anyone else thought?
Put like this, the whole idea of contrary opinion is absurd.
Great investors make up their own minds based on their own—original—research. As a result of that, they’ll often do the opposite of what the average investor is doing.
But not always.
When George Soros cleaned up by shorting the pound sterling in 1992, he was far from alone. Currency traders know that when the minister of finance announces that his currency won’t be devalued, it’s usually a sure sign that the writing is on the wall.
In 1992, Soros was one of the “herd” of currency traders betting the pound was about to collapse.
What launched Soros into the limelight was that his profit was $2 billion! Compared to “just” the hundreds of thousands or millions that other traders made.
And if anything, the crowd was following him, not the other way around.
Who’s consistently wrong?
The other problem with the idea of contrary opinion is that who, exactly, should you be contrary to? Which class of investors—institutions, fund managers, investment advisors, newsletter writers, or “average” investors—is consistently wrong?
And if you’ve figured that out, how do you find out what they’re doing so you can do the opposite?
The market is made up of millions of people. There’s no way anybody can tell with any precision what they’re all up to—let alone what they’re thinking.
Investment “gurus”—whether major or minor ones—will often give the impression that they know. For example, you might read in the newspaper’s daily market round up of some analyst saying: “Institutional investors were piling into the market today,” or something similar.
How did he know that? We have no idea. What’s more, we have no idea if he had any idea!
This is how it works. People want to know why something happened: reporting that the Dow went up 30 points or the euro was down 1 cent does not a story make.
So the journalist whose job it is to write this daily commentary flips through his Rolodex of contacts and selects a couple to call for an opinion. “What caused the market/IBM/the dollar to go up/down today?” is the kind of question he’ll ask.
The Analyst of the Day will give his explanation. And he won’t want to look like a dummy so if he doesn’t really know he’ll make something up.
I know this is how it works: I’ve been there, done that.
(The result, of course, is that the explanation given in, say, the Wall Street Journal can be the exact opposite of the one you’ll find in the Financial Times or Businessweek.)
And there’s the magazine cover “index.” Who hasn’t heard of the famous Businesweek cover announcing the “Death of Equities”—which ran in 1982, the year the greatest bull market in the history of stock markets began.
Perhaps the Economist also tried to make the theory of contrary opinion true. Back in 1998 they ran a cover story titled “Drowning in Oil”—just as oil was bottoming. And a 2004 cover heralded the “Disappearing Dollar”—the exact opposite to the dollar’s upsurge over the next four years!
With 20/20 hindsight, it’s easy to see these were great “calls” for the contrary opinion aficionado. But what about the other cover stories they ran that were right? They never get mentioned by proponents of the theory of contrary opinion. But you’d have to collate them first before you could rely on any consistent inaccuracy.
To try and figure out what “the crowd” is thinking or doing requires lots of research. And if that research is to be sufficiently complete to be accurate it’s unlikely to be available until a long time after it’s useful.
And maybe not even then. Economists and historians are still arguing about the exact causes of the stock market crash in 1929 almost a century after it happened.
Perhaps there is some group of investors or opinion makers—“average” investors, fund managers, institutions, advisors, magazine covers, and so on—which gets it wrong most of the time.
But the reality is rather like a friend of mine put it about a certain investment advisor: “If only he was wrong all the time, I could make a bundle of money.” Sad to say, if there are any shortcuts to wealth, the theory of contrary opinion isn’t one of them.
Diversification. The investment strategy most investment advisors recommend—mainly because they don’t know what they’re doing
At first glance, you’d think that great investors like Warren Buffett and George Soros have little or nothing in common.
Buffett’s trademark is buying great businesses for considerably less than what he thinks they’re worth—and owning them “forever.” Soros is the archetypal speculator, famous for making huge, leveraged trades in the currency and futures markets.
No two investors could seem more opposite. Yet there are a surprising number of mental habits and strategies they both share—traits that underlie their amazing success.
For example, they are both highly risk-averse—but they never diversify their investments.
This sounds like a contradiction in terms. Surely, if you don’t diversify, you must be taking more risk. Doesn’t just about every investment advisor, broker and financial planner recommend diversification as the best, if not the only way, you can protect yourself from losing money in the markets?
When Buffett and Soros decide to make an investment, they always buy as much as they can. Buffett (net worth from the Forbes 2013 rich list: $65.4bn) has had as much 35% of his assets in a single stock. Soros ($23bn) sometimes builds speculative positions that exceed his entire net worth. And another great investor, Carl Icahn ($24bn), has on occasion had all his assets in just one stock!
What’s more, analyzing their past investments proves that always buying as much as they can is how they built their incredible fortunes . . . from nothing.
If they’d practiced diversification, we’d never have heard of them.
How can this be? How come investment professionals—the people who after all should know best—tell us we must diversify, while the world’s most successful investors do the exact opposite?
First, let’s consider what diversification really means.
Compare two portfolios. The first is diversified among one hundred different stocks; the second is concentrated, with just five.
If one of the stocks in the diversified portfolio doubles in price, the value of the entire portfolio rises just 1%. The same stock in the concentrated portfolio pushes the investor’s net worth up 20%.
For the diversified investor to achieve the same result, 20 of the stocks in his portfolio must double—or one of them has to go up 2,000%. Now, what do you think is easier to do:
No contest, right?
Of course, on the other side of the coin, if one of the diversified investor’s stocks drops in half, his net worth only declines 0.5%. If the same thing happens in the second portfolio, the concentrated investor sees his wealth drop 10%.
But let me ask you the same question again . . . which is easier to do:
Same answer: no contest.
So diversification is a great risk-avoidance strategy. But it has one unfortunate side-effect: by its very nature, it’s also a great profit-avoidance strategy—which is why I call it one of the Seven Deadly Investment Sins.
As Fortune magazine once put it: “One of the fictions of investing is that diversification is a key to attaining great wealth. Not true. Diversification can prevent you from losing money, but no one ever joined the billionaire’s club through a great diversification strategy.”
Fair enough. But the underlying assumption of the adviser who tells us to diversify is that the only alternative is to take too much risk. Which is the certainly the advice they’d give you if—like Carl Icahn—you wanted to put all your money into just one stock.
For a moment, let’s move our attention from investors and investing to successful businessmen. Did Bill Gates, for example, start several businesses at once to be sure of success?
Of course not! We know almost intuitively that if someone is going to build a successful business, he has to focus on just that business and nothing else pretty much 24 hours a day for ten, even twenty years. And that if he started out with two or three different businesses, he’d fail at every one for sure.
It’s quite true that most new businesses fail. But every business consultant advises their clients to not even think about entering a second business until, at the very least, they’ve made their first business successful. Furthermore, they all stress, success depends on focusing their attention and concentrating their energies in as narrow a field as possible.
And that’s exactly what the great investors do.
One other thing to keep in mind is that for the Buffetts and Soroses of this world, investing is their bread and butter—and their life’s work. To them taking a loss, no matter how small, is like taking a pay cut: something to be avoided at all costs.
So their first aim is always to avoid risk, and they work hard to ensure that for every one of their investments, their risk of loss is minimal to non-existent. Only then do they worry about profits.
How can they be risk-averse, yet never diversify? By using four other methods of risk-control that your Wall Street advisor has probably never heard of—but are far more effective than diversification.
Warren Buffett, for example, waits until he finds an investment that, to him, is a bargain. When he finds a company he can buy at 50 to 75 cents in the dollar, he acts like the supermarket shopper who sees her favorite soap on sale at 50% off and loads up her trolley with as much as she can.
“You Call That a Position?”
Soon after he took over management of the Quantum Fund from George Soros, Stanley Druckenmiller shorted the dollar against the German mark. The trade was showing a profit when Soros asked him, “How big a position do you have?”
“One billion dollars,” Druckenmiller answered.
“You call that a position?” Soros said, a question that has become a part of Wall Street folklore.
Soros prompted him to double his position.
“Soros has taught me,” noted Druckenmiller, “that when you have tremendous conviction on a trade, you have to go for the jugular. . . . It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.
“As far as Soros is concerned, when you’re right on something, you can’t own enough.”
Which is exactly what Buffett does when he finds a company “on sale” at 50% off.
Of course, unlike your neighborhood supermarket, the stock market never runs an ad to tell you when a company is on sale at a bargain price.
The great investor has to find such bargains himself. So he spends nearly all his time and energy searching for opportunities that he is sure will make him a bundle of money with minimal risk.
Investments like these are very difficult to find. Who knows when he’ll come across the next one? What’s the point in sitting on a pile of cash waiting for an opportunity that may be a long time coming when, right now, he can see piles of money sitting on the table, begging to be scooped up?
That’s why when Buffett and Soros buy, they buy big.
To quote from another legendary investor, Bernard Baruch:
“It is unwise to spread one’s funds over too many different securities. Time and energy are required to keep abreast of the forces that may change the value of a security. While one can know all there is to know about a few issues, one cannot possibly know all one needs to know about a great many issues.”
Or as Warren Buffett puts it: “Diversification is a protection against ignorance. [It] makes very little sense for those who know what they’re doing.”
Accountants have nearly all the tools they need to be GREAT investors. If only they knew it
Balance sheets can tell all kinds of interesting stories.
A friend of mine once asked me what I thought of a company he worked with. I did some digging and the next time we met, I asked him: “Is the boss sleeping with his secretary?”
“How did you figure that out?” he asked me.
“Well,” I told him, “according to the latest annual report, a woman whose job description is ‘secretary’ is getting an enormous salary, plus stock options and all kinds of other benefits. IBM could hire a high-powered executive for what she’s getting paid.”
Nuggets of Gold
Not all companies have such scandalous tidbits hidden away in the fine print. But the ability to read a balance sheet and a profit and loss statement—especially if you can read between the lines—is a powerful way to dig up listed companies with hidden nuggets of gold. And just as importantly, weed out the dross.
It was these tools that the legendary investor, Benjamin Graham—author of the classic investment primer, The Intelligent Investor—used to build his fortune. These same tools are major weapons in the armory of his star student, Warren Buffett.
Graham analyzed companies’ annual reports to find stocks that were selling below their intrinsic (or “break-up”) value. He didn’t visit company managements; he didn’t even want to know what products the companies sold; he was only interested in the numbers.
Of course, there is a danger in this approach. Often, a company’s stock is selling below its net worth for very good reasons. Maybe it’s just because the market has hammered it down. But perhaps the industry is in decline, the management is incompetent, a new competitor with a superior product is decimating the company’s sales . . . there are a host of possibilities.
By solely relying on annual reports, Graham had no idea why a company was cheap. So he could—and did—buy stocks that declined, taking a loss.
Nevertheless, his investments returned profits of 17% a year, on average, over several decades.
How did he achieve this when, clearly, some of the stocks he bought turned out to be dogs?
He bought a large number of cheap stocks, knowing that while he’d lose money on some of them, he’d make more money on the rest.
To help ensure that outcome, he’d only buy companies with histories of steady management, rising profits and regular dividends. All information you can find in annual reports.
This would weed out many (though not all) of the companies that were cheap because they deserved to be.
And he had another, crucial rule: he would only buy a stock selling for less than half its liquidation value, which he called his “margin of safety.”
Stocks like that are a lot harder to find today than they were in the 1930’s, 40’s and 50’s when Graham was active. But not impossible: Walter Schloss, a contemporary of Buffett’s who was also a Graham disciple, continued to follow Graham’s style with great success until he retired in 2002 at the age of 85.
Clearly, mastery of an accountant’s tools are essential for anyone who wishes to successfully invest in stocks.
But if that is all you needed, you wouldn’t be able to hire an accountant for love or money. They’d all be sunning themselves in the south of France watching their investment profits roll in.
So why haven’t more accountants retired from keeping other people’s books in favor of “clipping their own coupons”?
Two main reasons.
Few of them realize that unravelling the secrets hidden in an annual report are an essential talent for anyone who wants to identify a great investment—and that they already have all those necessary skills at their fingertips.
But—to turn those insights into market profits also requires a complete investment system: a method or a set of rules that tells you what to do once you’ve found an investment that looks promising.
And for those of us who aren’t accountants and (let’s be honest) don’t want to be?
After all, our real interest is not accounting but investment valuation. So why not start with the man who so applied all these “accounting” tools to valuing investments so successfully: Benjamin Graham and his classic, The Intelligent Investor? After which you might consider “graduating” to his Security Analysis.
No need to reach for any of those dry and dusty accounting textbooks after all.
“Know thyself” is one of the secrets of investment success
Every successful investor has his own approach that suits his personality. Warren Buffett, for example, began his investing career in the 1950s as a Benjamin Graham “clone” (see more on Graham’s style in 7 Investment Tips From the World’s Richest Investors). Today, while some of the criteria he applies today are different from Graham’s, he still aims to buy below intrinsic value. But he now defines intrinsic value as the discounted present value of a company’s future earnings, not its break-up value, which was Graham’s metric.
Sir John Templeton is also a former Graham student. But he didn’t just look for the cheapest stocks in the United States; he searched for the cheapest stocks in the entire world, and made a fortune for himself and his investors in the process.
George Soros—whose success owes nothing to Graham or Buffett—has an entirely different and speculative approach. Even so, Soros’s investment system is composed of the same 12 building blocks as Graham’s and Buffett’s.
What’s more, so are the investment approaches of Bernard Baruch, Carl Icahn, Peter Lynch, Philip Fisher and all the other successful investors I’ve studied and worked with.
Even successful investors in real estate, antiques and collectibles, not to mention commodity and currency speculators—totally different markets—owe their success to having a system comprised of the same essential elements—one that fits their personality and interests.
Do you know what your investment style is? The simplest way to find is to answer my Investor Personality Profile questionnaire. And while you’re there, compare your Investment IQ with Warren Buffett’s, George Soros’, and Carl Icahn’s. You’ll receive a detailed analysis of your strengths and weaknesses—and how to turn those weaknesses into strengths.
Mark Tier, an Australian based in Hong Kong, started writing when he was 14—and hasn’t stopped since.
His first work, Understanding Inflation, was a bestseller in his native Australia in 1974. That was followed by The Nature of Market Cycles, How To Get A Second Passport, and The Winning Investment Habits of Warren Buffett & George Soros, which has been published in 3 English (New York, London, & Hong Kong) and 11 other-language editions.
Once labelled “the Eclectic Investor” for his wide range of interests (he has been a soldier, businessman, publisher, investment analyst, counsellor, coach, writer, investor, speaker, editor, foreign correspondent, and even co-founded a political party), he co-edited two science fiction anthologies, Give Me Liberty and Visions of Liberty, which won a Prometheus Award in 2005, an analysis of Christianity, When God Speaks for Himself, a political thriller, Trust Your Enemies, and Ayn Rand’s 5 Surprisingly Simple Rules for Judging Political Candidates.
See more at marktier.com
Warren Buffett and George Soros are the world’s most successful investors.
Buffett’s trademark is buying great businesses for considerably less than what he thinks they’re worth — and owning them “forever.” Soros is famous for making huge, leveraged trades in the currency and futures markets.
No two investors could seem more different. Their investment methods are as opposite as night and day. On the rare occasions when they bought the same investment, it was for very different reasons.
What could the world’s two most successful investors possibly have in common?
On the face of it, not much. But I suspected that if there is anything Buffett and Soros both do, it could be crucially important…perhaps even the secret behind their success.
The more I looked, the more similarities I found. As I analyzed their thinking, how they come to their decisions, and even their beliefs, I found an amazing correspondence. For example:
As I analyzed their beliefs, behaviors, attitudes and decision-making strategies, I found 23 mental habits and strategies they both practice religiously. And every one of them is something you can learn.
My next step was to “test” these habits against the behavior of other successful investors and commodity traders. The match was perfect.
Peter Lynch, who produced an annual return of 29% during the years he ran the Fidelity Magellan Fund; legendary investors such as Bernard Baruch, Sir John Templeton and Philip Fisher; and every one of dozens of other highly successful investors ( and commodity traders) I’ve studied and worked with, all practice exactly the same mental habits as Buffett and Soros, without exception.
Cultural background makes no difference. A personally dramatic moment came when I interviewed a Japanese investor living in Hong Kong who trades futures in Singapore, Tokyo and Chicago using Japanese “candlestick” charts. As the conversation proceeded, I checked off one habit after another from my list until I had 22 ticks.
And then he asked whether I thought he was liable for any tax on his profits from trading. That completed the list. (Thanks to Hong Kong’s liberal tax regime, it was easy for him to legally do what he wanted: trade tax-free.)
The final test was whether these habits are “portable.” Can they be taught? And if you learnt them, would your investment results change for the better?
I started with myself. Since I used to be an investment advisor, and for many years published my own investment newsletter, World Money Analyst, it’s embarrassing to admit that my own investment results had been dismal. So bad, in fact, that for many years I just let my money sit in the bank.
When I changed my own behavior by adopting these Winning Investment Habits, my investment results improved dramatically. Since 1998 my personal stock market investments have risen an average of 24.4% per year — compared to the S&P which went up only 2.3% per year. * What’s more I haven’t had a losing year, while the S&P was down three out of those six years. I made more money more easily than I ever thought possible. You can too.
It makes no difference whether you look for stock market bargains like Warren Buffett, trade currency futures like George Soros, use technical analysis, follow “candlestick” charts, buy real estate, buy on dips or buy on breakouts, use a computerized trading system — or just want to salt money away safely for a rainy day. Adopt these habits and your investment returns will soar.
Applying the right mental habits can make the difference between success and failure in anything you do. But the mental strategies of Master Investors are fairly complex. So let’s first look at a simpler example of mental habits.
Some people are poor spellers. They exasperate their teachers because nothing the teacher does makes any difference to their ability to spell.
So teachers assume the students aren’t too bright, even when they display better-than-average intelligence at other tasks — as many do.
The problem isn’t a lack of intelligence: it’s the mental strategies poor spellers use.
Good spellers call up the word they want to spell from memory and visualize it. They write the word down by “copying” it from memory. This happens so fast that good spellers are seldom aware of doing it. As with most people who are expert at something, they generally can’t explain what they do that makes their success possible…even inevitable.
By contrast, poor spellers spell words by the way they sound. That strategy doesn’t work very well in English.
The solution is to teach poor spellers to adopt the mental habits of good spellers. As soon as they learn to “look” for the word they want to spell instead of “hearing” it, their spelling problem disappears.
I was amazed the first time I showed a poor speller this strategy. The man, a brilliant writer, had gotten a string of Bs in school all with the comment: “You’d have gotten an A if only you’d learn how to spell!”
In less than five minutes, he was spelling words like “antidisestablishmentarianism,” “rhetoric” and “rhythm,” which had confounded him all his life. He already knew what they looked like; he just didn’t know that he had to look!†
Such is the power of mental habits.
A habit is a learned response that has become automatic through repetition. Once ingrained, the mental processes by which a habit operates are primarily subconscious.
This is clearly true of the good speller: he is completely unaware of how he spells a word correctly. He just “knows” that it’s right.
But doesn’t most of what the successful investor does take place at the conscious level? Aren’t reading annual reports, analyzing balance sheets, even detecting patterns in charts of stock or commodity prices conscious activities?
To an extent, yes. But consciousness is only the tip of the mental iceberg. Behind every conscious thought, decision or action is a complex array of subconscious mental processes — not to mention hidden beliefs and emotions that can sabotage even the most determined person.
For example, if someone’s been told “You can’t spell” over and over again, that belief can become part of his identity. He can understand the good speller’s strategy, and with an instructor’s guidance can even replicate the good speller’s results. But left to his own devices, he quickly reverts to his old mental pattern.
Only by changing the belief that “I am a poor speller” can he adopt the good speller’s mental habits.
Another, though usually minor, stumbling block is the lack of an associated skill. A tiny percentage of people simply can’t create an internal mental image: they have to be taught how to visualize before they can become good spellers.
Four elements are needed to sustain a mental habit:
Let’s apply this structure to analyze another process, one that’s simpler than the habits of highly successful investors but more complex than the “Spelling Strategy.”
Imagine we’re at a party and we see two men eyeing the same attractive woman. As we watch, we notice that the first man starts to walk towards her but then stops, turns, heads over to the bar, and spends the rest of the evening being an increasingly drunken wallflower. A few moments later, we see the second man walk over to the woman and begin talking with her.
A while later we become aware that the second man seems to be talking to just about everybody at the party. Eventually, he comes over to us and initiates a conversation. We conclude that he’s a really nice guy, but when we think about it later we realize he didn’t say very much at all: we did most of the talking.
We all know people like this, who can walk up to a total stranger and in a few minutes be chatting away like they’re lifelong friends. I call them “IceBreakers,” and behind their behavior is the mental habits they practice:
You can get a taste of how this works by trying it out for yourself. Just imagine (if you don’t already believe it) that you consider all people are interesting; and hear your own voice saying, “Isn’t he/she an interesting person.” Then look around, and if you’re alone imagine that you’re in the middle of a crowd. You should be able to feel the difference (if only for a moment).
The Wallflower, who ended up at the bar, had a very different mental strategy. After an initial flash of interest, he “ran a movie” in his head of all the times he had been hurt in a relationship, felt lousy — and went to have a beer to drown his sorrows. His emotional reaction was the expression of a subconscious, self-limiting belief that “I’m not good enough,” or “I always get hurt in relationships.”
Another pattern when meeting someone new is to continually wonder: “Is this person interesting (to me)?” This “Self-Centered” approach reflects a belief that only some people are interesting. And it has very different behavioral consequences.
On the next page is a chart of these three different mental habits.
The Wallflower or the Self-Centered person can easily learn all the IceBreaker’s skills: how to establish rapport, how to “smile with your eyes,” how to be a good listener and so on. He can even create an internal voice saying, “Isn’t he/she an interesting person.”
But what happens when the Wallflower actually tries to initiate a conversation with a complete stranger? His self-limiting beliefs override his conscious attempt to do something different — and nothing happens.
In the same way, an investor who subconsciously believes that “I don’t deserve to make money” or “I’m a loser” cannot succeed in the markets no matter how many skills he learns or how hard he tries.
There are similar kinds of beliefs that lie behind many investors’ losses, beliefs that I call The Seven Deadly Investment Sins . . .
“The world is full of get-rich-quick schemes, but this definitely isn’t one of them.”
“Instead, Tier teaches readers to invest smartly by delving into the skills, philosophies and investment strategies of some of the world’s richest self-made men — Warren Buffett (Berkshire Hathaway, Inc.), Carl Icahn (Ichan & Co.) and George Soros (Quantum Fund) among them.” — Publishers Weekly
* 1 January 1998 to 31 December 2003.
† The Spelling Strategy was developed by Robert Dilts, co-developer of the branch of applied psychology known as Neuro-Linguistic Programming.
The Seven Deadly Investment Sins are widely-held beliefs about investing that are hazardous to your wealth. Beliefs that Master Investors like Warren Buffett and George Soros emphatically do not share.
For example, what’s the main topic of the investment section of the newspaper — or any financial TV program? What the market’s going to do next.
This is an expression of what I call “The First Deadly Investment Sin: You have to predict the market’s next move to make big returns.”
Not true. As George Soros himself puts it: “My financial success stands in stark contrast with my ability to forecast events.” And Buffett? He simply couldn’t care less about what the market might do tomorrow.
Another common belief is that to make big investment profits you have to take big risks. Yet both Warren Buffett and George Soros are highly risk-averse. Paradoxically, when they invest they’re far more concerned about not losing money than about making it.
These are just two of the many traits these Master Investors share that fly in the face of the conventional investment wisdom.
Do you unwittingly subscribe to any of the Seven Deadly Investments — any one of which could be costing you a bundle of money?
You’ll find the answers in Chapter 2 of The Winning Investment Habits of Warren Buffett and George Soros, which you can download here.
[*“To survive in the financial markets sometimes means beating a hasty retreat.” *]— George Soros
[_“It’s not risky to buy securities at a fraction of what they are worth.” _]— Warren Buffett
=. |=\2. WINNING HABIT #2:
Passionately Avoid Risk | =. |=. The Master Investor |=. The Losing Investor | =. |=. As a result [of Habit #1], is risk-averse. |=. Thinks that big profits can only be made by taking big risks. |
“What’s your risk profile?”
After discovering that Master Investors such as Warren Buffett and George Soros avoid risk like the plague, I hope this sounds like a pretty dumb question. Because it is.
But let’s suspend disbelief for a moment to investigate what it means.
The average investment advisor’s recommended portfolio will vary depending on his client’s “appetite for risk.” If the client wants to avoid risk he will be offered a well-diversified portfolio of “safe” stocks and bonds that (theoretically) won’t lose money — or make much, either.
If a client is willing to take risks he’ll probably be advised to invest in a portfolio full of so-called growth stocks, all with great promise but no guarantees.
This counsel makes sense to the advisor and the client who both believe it’s impossible to make above-average profits without exposing yourself to the risk of loss…the Fifth Deadly Investment Sin.
When someone asks you “What is your risk profile?” or “What’s your appetite for risk?” what they’re really asking you is:
“How much money are you willing to lose?”
— Richard Russell, editor, Dow Theory Letters
Fancy phraseology like “risk profile” merely disguises the belief that you must be willing to take the chance of losing a bundle of money in order to have the chance of making any.
Yet the practical application of making preservation of capital your first priority (Habit #1) is to be risk-averse. If, like Buffett and Soros, you can be risk-averse and make far-above-average profits, there must be something severely wrong with the conventional wisdom.
Unsurprisingly, the Master Investor has a very different perspective on risk than the average investment professional. For example, Buffett puts “a heavy weight on certainty. If you do that, the whole idea of a risk factor doesn’t make any sense to me.”
To the Master Investor, risk is contextual, measurable, and manageable and/or avoidable.
Is the construction worker who walks along a plank 60 floors up in an unfinished skyscraper without a safety harness taking a risk? What about the expert skier who zooms down the almost vertical double-black diamond slope at 60 miles an hour? Or the experienced rock-climber, whose fingers are the only things holding him 100 feet up a vertical cliff-face?
You would probably say, “Yes!” But what you really mean is: “Yes — if it was me.”
Risk is related to knowledge, understanding, experience and competence. Risk is contextual.
While we can’t be certain that the construction worker, the skier and the rock-climber are taking no risks, intuitively we know they are taking less risk than we would, if we did what they did. The difference is unconscious competence.
If you’re an experienced driver, you have the ability to make instantaneous judgments — whether to slow down, speed up, turn right or left — to avoid a potential accident or a pothole in the road.
You can probably recall times when you have hit the brakes or swerved to avoid an accident — yet not been fully aware, consciously, of the nature of the danger until after you’d taken evasive action. The decision was made entirely at the subconscious level of your mind.
Such automatic reactions come as the result of years of experience.
Think about it for a moment and you’ll realize that driving a car is quite a complicated activity. Think of all the things you’re monitoring at the same time:
Even an apparently simple thing like changing lanes on the freeway is what’s called a multi-body problem in physics. You have to monitor your speed, the speed of the traffic, the speed of the cars behind you and in front of you on the lane you’re in and the lane you want to move into; while maintaining awareness of traffic in theotherlanes just in case. And you also have to make a judgment as to whether or not the drivers in the other lane are going to let you in.
And you do all this at the same time, almost instantaneously.
Multi-body problems often stump the physicist. That’s even though the physicist has a great advantage over you, the driver: the particles he’s studying don’t have free will. If they’re moving in a certain direction at a certain speed, they don’t suddenly swerve right or left or speed up or slow down. And nor do they drink and drive.
In a state of unconscious competence, you solve the multi-body problem automatically — and just change lanes.
While your subconscious mind directs your driving, your conscious mind is free to carry on a conversation, be aware of the sights, or listen to the radio.
But for someone who has never driven before and has no experience or competence, just getting behind the wheel of a car is a high-risk, life-threatening activity. Like you…before you’d learnt to drive.
The Master Investor acts apparently effortlessly and instantaneously in a way that, to the outsider, seems risky — especially when the Master doesn’t even seem to pause to think.
Warren Buffett can decide to buy a multi-million dollar company in 10 minutes or less, doing all the calculations in his head. He doesn’t even need the back of an envelope. What’s more, most of the decisions he’s made so quickly have proven to be the right ones.
That’s only possible for someone who has gone through the four stages of learning:
Unconscious incompetence is the state where you don’t even know that you don’t know: the state of mind so many young drivers are in when they begin to learn to drive. That’s why young drivers have many more accidents than older, more experienced drivers: they fail (or refuse) to recognize their limited knowledge, skill and experience.
People in this state are highly likely to take risks — expose themselves to danger or loss — for the simple reason they’re totally unaware that that’s what they’re doing.
Investors who subscribe to any or all of the Seven Deadly Investment Sins are in this state. They think they know what they’re doing; and they fail to recognize the reality of their ignorance.
Unconscious incompetence is also the reason why the worst thing that can happen to a novice investor is to make a pile of money on his very first investment. His success leads him to believe that he’s found the secret of trading or investing and that he really knows what he’s doing. So he repeats whatever he did the first time — only, much to his own surprise, to lose money hand over fist.
As futures trader Larry Hite explained to Jack Schwager in his book Market Wizards:
I once worked for a firm where the company president, a very nice guy, hired an option trader who was brilliant, but not very stable. One day the option trader disappeared, leaving the firm stuck with a losing position. The president was not a trader, and he sought my advice.
“Larry, what do you think I should do?”
I told him, “just get out of the position.”
Instead, he decided to hold on to the trade. The loss got a little worse, but then the market came back, and he liquidated the position at a small profit.
After this incident, I told a friend who worked at the same firm, “Bob, we are going to have to find another job.”
“Why?” he asked.
I answered, “We work for a man who has just found himself in the middle of a mine field, and what he did was close his eyes and walk through it. He now thinks that whenever you are in the middle of a mine field, the proper technique is to close your eyes and go forward.”
Less than one year later…this same man had gone through all of the firm’s capital.
Being in a state of unconscious incompetence can be highly hazardous to your wealth.
Conscious incompetence is the first step to mastering any subject. It’s the conscious admission to yourself that you really don’t know what to do, and the full acceptance of your own ignorance.
This may result in feelings of despair or futility or hopelessness — which stops some people from investing entirely. But it’s the only way to realize that to master the subject requires a process of intensive learning.
Conscious competence is when you’re beginning to have mastery of a subject, but your actions have yet to become automatic. In this stage of mastery, you have to take every action at the conscious level. While learning to drive, for example, you must be consciously aware about where your hands and feet are; think through each decision about whether to hit the brakes, turn the wheel, change gears…and as you do so, think consciously about how to do it.
In this stage, your reactions are far slower than the expert’s.
This doesn’t mean you can’t do it: far from it. You could make the same investment decision as Warren Buffett. But what took Buffett 10 minutes to decide might take you 10 days…or even 10 months: you have to think through every single aspect of the investment, and consciously apply the tools of analysis (and acquire most of the knowledge) that Buffett has stored in his subconscious mind.
An amazing number of investors believe they can skip this stage of learning entirely. One way they attempt to do it is by adopting someone else’s unconscious competence: following a guru or a set of procedures developed by a successful investor.
But people who’ve read a book on Gann triangles or Dow Theory, or whatever, and follow the steps outlined, or who adopt someone else’s commodity trading system, sooner or later find that it doesn’t work for them.
There’s no short-cut to unconscious competence.
As your knowledge expands, as your skills develop, as you gain experience by applying them over and over again, they become more and more automated and move from your conscious mind into your subconscious.
You eventually reach the stage of…
Unconscious competence. This is the state of a Master, who just does it — and may not even know how, specifically, he does it.
When he acts from unconscious competence, the Master appears to make decisions effortlessly, and acts in ways that might scare you or me to death.
We interpret the Master’s actions as being full of risk. But what we really mean is that they’d be full of risk to us, if we took that same action. For example, as one visitor to Soros’s office recalled thinking — as Soros interrupted the meeting to place orders worth hundreds of millions of dollars — “I would shake in my boots, I wouldn’t sleep. He was playing with such high stakes. You had to have nerves of steel for that.”
Nerves of steel? Many people have made comments of that kind about Soros. What they mean is: I would have to have nerves of steel to do what Soros is doing. Soros doesn’t need nerves of steel: the Master knows what he is doing. We don’t — until we learn what the Master has learnt.
He knows what he is doing. Similarly, there’s bound to be something you do in your life that, to an outsider, seems full of risk but to you is risk-free. That’s because you have built up experience and achieved unconscious competence in that activity over the years. You know what you’re doing — and you know what not to do.
To someone who doesn’t have your knowledge and experience, what you do will seem full of risk.
It may be a sport — such as skiing, rock-climbing, scuba diving or car racing. It may be those instant, seemingly intuitive judgements you make in your business or profession.
Let me give you a personal example. Since it’s in a field you probably know nothing about, I’ll have to give you a little background first.
When I published my newsletter World Money Analyst, profits from mailshots — solicitations to gain new subscribers — were a regular source of income for me. There were times when I spent hundreds of thousands of dollars I didn’t have putting a promotion into the mail. Yet I never felt I was taking a risk.
p=. Can You Walk and Talk?
Two examples of unconscious competence that almost every human being on the planet has mastered are walking and talking.
Do you realize that every time you take a step you’re moving dozens of different muscles in your feet and legs? For just one step! You don’t even know what muscles you’re moving. If you tried to take just one step while consciously directing each muscle to contract or relax by the right amount in the right sequence, you’d fall right over.
To walk, you just decide consciously to go there, and your subconscious mind does the rest.
It’s the same with speaking. You have mastery of your native language — and possibly others. Yet, you couldn’t explain to me any more than I could explain to you precisely how you store words, find them when you need them, and put them into grammatical (or at least understandable) sentences. Often, when you’re talking, you don’t know what specific word you’ll say next. All you’re aware of consciously is the meaning you want to communicate.
Unconscious competence is the brain’s way of dealing with the limitations of consciousness. We can only hold seven bits of information (plus or minus two) in our conscious minds at the same time. When our subconscious mind takes over, it frees our conscious mind to focus on what’s really important.
Practice makes permanent: repetition and experience are the tools we use to delegate functions to our subconscious mind.|
To send out a mailing, you have to pay for printing, lettershopping (putting everything into the envelopes), renting the mailing lists — and postage. Only the postage has to be paid up front; for everything else you can get 30 to 90 days’ credit.
From records I’d kept of every mailing I’d ever done I knew that by the seventh day of response I would have received about half the total revenue I could expect. Since that was more than the postage, I could start paying the other bills as they came due.
Ah, you might ask, but how do you know that money is going to come in?
The level of response depends on three variables: the headline, the copy (the text of the advertisement), and the mailing list. When you create a new advertisement, you don’t know for sure that it will work. So you test: mail out 10,000 or 20,000 pieces to the best mailing lists available. Unless the copy is complete drivel, you’re unlikely to lose very much money. (And if you lose the lot it’s only a couple of thousand dollars, so why worry?)
If the test mailing works (that is, if it’s profitable), you “roll it out” to other mailing lists. Because I was mailing regularly, I knew which mailing lists worked, which didn’t, and which worked sometimes. So I could select which mailing lists to roll out to, based on the profitability of the test. When the test was highly profitable, I could mail half a million pieces or more…if all I had to pay initially was the postage.
Still think I was taking unnecessary risks? I imagine you do. I’m not trying to convince you otherwise. But because I knew what I was doing, to me there was no risk at all.
Think about it for a while and I’m sure you’ll find several similar examples where you feel you are taking little or no risk — but it’s impossible to convince an outsider that there’s no risk involved.
Risk declines with experience: there are many things you do today which you think of as risk-free. But at one time in your life, before you built up the necessary knowledge and experience, they were high-risk activities for you.
When George Soros shorted the pound sterling with $10 billion of leverage (as he did in 1992), was he taking a risk? To us, he was. But we tend to judge the level of risk by our own parameters; or to think that risk is somehow absolute. On either of those measures, the risk was huge.
But Soros knew what he was doing. He was confident the level of risk was completely manageable. He’d calculated that the most he could lose was about 4%. “So there was really very little risk involved.”
As Warren Buffett says: “Risk comes from not knowing what you are doing.” The highly successful investor simply walks (or more likely runs) away from any investment that is risky to him. But since risk is relative and contextual, the investment that Warren Buffett may shy away from can be the one that George Soros scoops up with both hands. And vice versa.
Restricting his investments to those where he has unconscious competence is one way the Master Investor can be risk-averse and, at the same time, make above-average profits. But how did he build that unconscious competence in the first place? By discovering that risk is measurable — and by learning what to measure.
The Master Investor thinks in terms of certainty and uncertainty, and his focus is on achieving certainty. He isn’t really “measuring risk” at all. He is measuring the probability of profits in his continual search for, as Warren Buffett puts it, “high probability events.” And he finds them by answering the question:
I once asked an investor what his aim was. He replied: “To make 10% a year.”
“And what’s your measure of whether you’re achieving that?”
He answered: “By whether I made 10% or not.”
This investor is rather like an architect who measures the quality of his building by whether or not it stands up when it’s finished. Whatever result you are trying to achieve can only be the measure of whether you have achieved it; not the measure of whether you will.
A good architect knows that his building will stand up while it’s still a blueprint. He knows this by measuring the strength of the materials, the loads they will have to bear, and the quality of the design and construction.
In the same way, the Master Investor knows, before he invests, whether he is likely to make a profit.
Profit (or loss) is a residual: the difference between income and expenditure. As a result, it’s only measurable with the benefit of hindsight.
For example, a business does not make profits by aiming to make profits. It must focus on the activities that are measurable in the present, and later result in profits: in other words, activities that increase sales and income and/or cut costs. And by only undertaking activities where the managers are confident that income will exceed costs.
Master Investors focus their attention not on profits, but on the measures that will inevitably lead to profits: their investment criteria.
Warren Buffett doesn’t buy a stock because he expects it to go up. He’ll be the first to tell you the price could just as easily drop the moment after he’s bought it.
He buys a stock (or the entire company) when it meets his investment criteria, because he knows from experience that he will ultimately be rewarded by either a higher stock price or (when he buys the whole company) rising business profits.
For example, in February 1973 Buffett began buying shares in the Washington Post Co. at $27 a share. As the price fell Buffett bought more and by October was the largest outside shareholder. To Buffett, the Washington Post was a $400 million business that was on sale for just $80 million. But that’s not what Wall Street saw — even though most publishing analysts agreed with Buffett on the company’s valuation.
Wall Street saw a collapsing market. The Dow was off 40%, and the “Nifty Fifty” stocks such as IBM, Polaroid and Xerox — which only a few years before Wall Street had been happy to buy at 80 times earnings — were off 80% or more. The economy was in recession and inflation was rising. That wasn’t supposed to happen: recession was supposed to send inflation down. To Wall Street, it looked like the “end of the world” might be coming. This was definitely not a time to buy stocks; and with inflation rising you couldn’t even find safety in bonds.
When they looked at the Washington Post Co., investment professionals saw a stock that had fallen from $38 to $20 a share and which, like the market, could only go down. The “risk” of buying was far too high.
The irony is that the Post could have sold its newspaper and magazine businesses to another publisher for around $400 million — but Wall Street wouldn’t buy it for $80 million!
To Buffett, when you can buy a sound, attractive business at an 80% discount to its value, there’s no risk at all.
Buffett wasn’t looking at the market — or the economy. He was using his investment criteria to measure the quality of the Post’s business. What he saw was a business that he understood; that due to its effective monopoly in the Washington area had favorable economics that were sustainable (and because of its “monopoly” could raise prices in line with inflation and, so, was an inflation hedge); wasn’t capital-intensive; was well-managed — and, of course, was available at a very attractive price.
While Wall Street was driven by fear of loss, and called it “risk,” Buffett and other investors who knew what to measure were cleaning up. Intriguingly, often when the market is collapsing investment professionals suddenly discover the importance of preserving capital, and adopt a “wait-and-see” attitude…while investors who follow the first rule of investing, “Never Lose Money,” are doing the exact opposite and jumping in with both feet.
After Buffett had made his investment the price of the Washington Post Co. kept falling. Indeed, it was two years before the market came back to his original average purchase price of $22.75 per share. But Buffett didn’t care about the share price; his focus was on his investment criteria, on measuring the quality of the business. And that quality — to judge by earnings alone — was improving.
Soros achieves investment certainty in a very different way. Like Buffett, he measures his investments — all successful investors do — but Soros applies very different investment criteria.
The key to Soros’s success is to actively manage risk, one of the four risk-avoidance strategies Master Investors use:
In the investment marketplace, you are what you measure.
1. Don’t Invest.
2. Reduce risk (the key to Warren Buffett’s appraoch.)
3. Actively manage risk (the stratgy George Soros uses so astoundingly well).
4. Manange risk actuarially.
There’s a fifth risk-avoidance strategy that’s highly recommended by the majority of investment advisors: diversification. But to Master Investors, diversification is for the birds (see Chapter 7). No successful investor restricts himself to just one of these four risk-avoidance strategies. Some — like Soros — use them all.
This strategy is always an option: Put all your money in Treasury bills — the “risk-free” investment — and forget about it.
Surprising as it may seem, it is practiced by every successful investor: when they can’t find an investment that meets their criteria, they don’t invest at all.
Even this simple rule is violated by far too many professional fund managers. For example, in a bear market they’ll shift their portfolio into “safe” stocks such as utilities, or bonds…on the theory they’ll go down less than the average stock. After all, you can’t appear on Wall Street Week and tell the waiting audience that you just don’t know what to do at the moment.
This is the core of Warren Buffett’s entire approach to investing.
Buffett, like all Master Investors, invests only in what he understands, where he has conscious and unconscious competence.
But he goes further: his method of avoiding risk is built into his investment criteria. He will only invest when he can buy at a price significantly below his estimate of the business’s value. He calls this his “Margin of Safety.”
Following this approach, almost all the work is done before an investment is made. (As Buffett puts it: “You make your profit when you buy.”) This process of selection results in what Buffett calls “high probability events”: investments that approach (if not exceed) Treasury bills in their certainty of return.
This is primarily a trader’s approach — and a key to Soros’s success.
Managing risk is very different from reducing risk. If you have reduced risk sufficiently, you can go home and go to sleep. Or take a long vacation.
Actively managing risk requires full-focused attention to constantly monitor the market (sometimes minute-by-minute); and the ability to act instantly with total dispassion when it’s time to change course (when a mistake is recognized, or when a current strategy is running its course).
Soros’s ability to handle risk was “imprinted” on him during the Nazi occupation of Budapest, when the daily risk he faced was death.
His father, being a Master Survivor, taught him the three rules of risk which still guide him today:
1. It’s okay to take risks.
2. When taking a risk, never bet the ranch.
3. Always be prepared to beat a hasty retreat.
In 1987, Soros had positioned the Quantum Fund to profit from his hypothesis that a market crash was coming — in Japan — by shorting stocks in Tokyo and buying S&P futures in New York.
But on “Black Monday,” October 19th, 1987, his scenario came apart at the seams. The Dow dropped a record 22.6%, which still stands as the largest one-day fall in history. Meanwhile, in Tokyo the government supported the market. Soros was bleeding at both ends of his strategy.
“He was on leverage and the very existence of the fund was threatened,” according to Stanley Druckenmiller, who took over management of the Quantum Fund two years later.
Soros didn’t hesitate. Following his third rule of risk management he got the hell out. But because his positions were so large, his selling drove down the price. He offered his 5,000 S&P futures contracts at 230, and there were no takers. Or at 220, 215, 205, or 200. Eventually he liquidated at between 195 and 210. Ironically, once he was out the selling pressure was gone, and the market bounced back to close the day at 244.50.29.
Soros had lost his entire profit for the year. But that didn’t faze him. He had admitted his mistake; realized he didn’t know what was going on; and, as he always did whether the mistake was minor or, as in this case, threatening to his survival, he went into risk-control mode. The only difference this time was the size of his positions and the illiquidity of the market.
Survive first. Nothing else was important. He didn’t freeze, doubt, stop to analyze, second-guess, or try to figure out whether he should hold on in case things turned around. He just got out.
Soros’s investment method is to form a hypothesis about the market, and then “listen” to the market to find out whether his hypothesis is right or wrong. In October 1987, the market was telling him he was wrong, dead wrong. As the market had shattered his hypothesis, he no longer had any reason to maintain his positions. Because he was losing money, his only choice was to beat a hasty retreat.
The crash of 1987 cast a cloud of doom and gloom over Wall Street that lasted for months. “Just about every manager I knew who was caught in that crash became almost comatose afterwards,” said Druckenmiller. “They became nonfunctional, and I mean legendary names in our business.”
As prominent hedge fund manager Michael Steinhardt candidly admits: “I was so depressed that fall that I did not want to go on. I took the crash personally. The issue of timing haunted me. My prescient forewarnings [recommending caution] earlier in the year made the losses all the more painful. Maybe I was losing my judgement. Maybe I just was not as good as I used to be. My confidence was shaken. I felt alone.”
Not Soros. He had taken one of the biggest hits of all, but he was unaffected.
He was back in the market two weeks later heavily shorting the dollar. Because he knew how to handle risk, because he followed his rules, he immediately put the crash behind him. It was history. And the Quantum Fund ended up 14.5% for the year.
A mental strategy that sets Master Investors apart is that they can totally disconnect their emotions from the market. Regardless of what happens in the market, they are unaffected emotionally. Of course, they may feel happy or sad, angry or excited — but they have the ability to immediately put that emotion aside and clear their minds.
Being in a state where you are controlled by your emotions makes you vulnerable to risk. The investor who is overcome by his emotions — even if he knows full well, intellectually, what to do when things go wrong — often freezes up; agonizes endlessly over what to do; and ends up selling, usually at a loss, just to relieve the anxiety.
Buffett achieves the necessary emotional distance through his investment method. His focus is on the quality of the business. His only concern is whether his investments continue to meet his criteria. If they do, he’s happy — regardless of how the market might be valuing them. If a stock he owns no longer meets his criteria, he’ll sell it — regardless of how the market prices it.
Warren Buffett simply doesn’t care what the market is doing. No wonder he often says he wouldn’t mind if the stock market closed down for ten years.
Like Buffett, Soros’s investment method helps distance him emotionally from the market. But his ultimate protection — aside from the self-confidence that he shares with Buffett — is that he “walks around telling whomever has the patience to listen that he is fallible.”
He bases an investment on a hypothesis he has developed about how and why a particular market will move. The use of the word “hypothesis” in itself signifies a very tentative stance, of someone unlikely to become “married to his position.”
Yet, as his public prediction that the “Crash of ’87” would start in Japan, not the US, bears witness, there were times when he was certain of what “Mr. Market” would do next. When it didn’t happen that way, he would be taken completely by surprise.
Overriding all the other beliefs Soros has is his conviction that he is fallible — the basis, as we will see, of his investment philosophy. So that when the market proves him wrong, he immediately realizes he’s made a mistake. Unlike too many investors, he doesn’t say “the market is wrong” and hang onto his position. He just gets out.
As a result, he can step back completely from his involvement, so appearing to others to be emotionless, a stoic.
The fourth way to manage risk is to act, in effect, like an insurance company.
An insurance company will write a life insurance policy without having any idea when it will have to pay out. It might be tomorrow; it might be 100 years from now.
It doesn’t matter (to the insurance company).
An insurance company makes no predictions about when you might die, when your neighbor’s house might burn down or be burgled — or about any other specific item it has insured.
The insurance company controls risk by writing a large number of policies so that it can predict, with a high degree of certainty, the average amount of money it will have to pay out each year.
Dealing with averages, not individual events, it will set its premium from the average expectancy of the event. So the premium on your life insurance policy is based on the average life expectancy of a person of your sex and medical condition at the age you were when you took out the policy. The insurance company is making no judgement about your life expectancy.
The person who calculates insurance premiums and risks is called an actuary; which is why I call this method of risk control “managing risk actuarially.”
This approach is based on averages of what’s called “risk expectancy.”
Even though the Master Investor may use the same, commonly accepted terminology, what he’s actually looking at is average profit expectancy.
For example, if you bet a dollar on heads coming up when you flip a coin, you have a 50:50 chance of winning or losing. Your average profit expectancy is 0. If you flipped a coin a thousand times and bet a dollar each time, you’d expect to end up with about the same amount of money you started with (provided, of course, that an unusual series of tails didn’t wipe you out).
50:50 odds aren’t at all exciting. Especially after you have paid transaction costs.
But if the odds are 55:45 in your favor, it’s a different story. Your total winnings over a series of events will exceed your total losses since your average profit expectancy rises to 0.1 — for each dollar you invest you can expect on average to get back $1.10.
Gamble -n. risky undertaking; any matter or thing involving risk
-v.t. risk much in the hope of great gain
-v.i. to stake or risk money on the outcome of something involving chance
Parallels are often drawn between investing and gambling — with good reason: in essence, the actuarial approach means “playing the odds.”
Another (but bad) reason is that far too many investors approach the markets with a gambling mentality: “in the hope of great gain.” This is even more often the case with people entering the commodity markets for the first time.
To make the analogy clear, consider the difference between a gambler, and a professional gambler.
A gambler plays games of chance for money — in the hope of making a great gain. Since he rarely comes out ahead, his primary reward is the excitement of playing the game. Such gamblers keep Las Vegas, Monte Carlo, Macau and lotteries the world over in business.
The gambler throws himself at the mercy of the “gods of chance.” However benign these “gods of chance” may be, their representatives on earth live by the motto “never give a sucker an even break.” The result, in Warren Buffett’s words:
Las Vegas has been built upon the wealth transfers that occur when people engage in seemingly-small disadvantageous capital transactions.
A professional gambler, by contrast, understands the odds of the game he’s playing, and only makes bets when the odds are in his favor. Unlike the weekend gambler, he doesn’t depend on one roll of the dice. He has calculated the odds of the game so that, over time, his winnings exceed his losses. He approaches the game with the mentality of an insurance company when it writes a policy. His focus: average profit expectancy. He has a system that he follows — just like the Master Investor. And part of the system, naturally enough, is to choose the game where it’s statistically possible to win over time.
Professional gamblers do more than just calculate probabilities: they look for situations where the odds are bound to be in their favor. A friend of mine, a member of Alcoholics Anonymous, lived a 60-minute ferry ride away from town. When he took a late ferry home there were always a bunch of drunks at a table at the back of the ferry, continuing their binge with beers from the bar.
A friend of mine, a member of Alcoholics Anonymous, lived a 60-minute ferry ride away from town. When he took a late ferry home there were always a bunch of drunks at a table at the back of the ferry, continuing their binge with beers from the bar. He’d pull up a chair, take a pack of cards from his bag and say, “Anyone feel like a round of poker?” |
You can’t eliminate chance from a game of poker, blackjack or roulette. But you can learn to calculate the odds, and decide whether it’s possible to play that game with the average profit expectancy (the odds) in your favor.
If it’s not, you don’t play.
Professional gamblers never buy lottery tickets.
Professional gamblers don’t actually gamble. They don’t “risk much in the hope of great gain.” They invest little, time after time, with the mathematical certainty that they will achieve a positive return on capital.
Investing isn’t gambling. But professional gamblers act at the poker table in the same way Master Investors act in the investment marketplace: they both understand the mathematics of risk, and only put serious money on the table when the odds are in their favor.
When Warren Buffett started investing, his approach was very different from the one he follows today. He adopted the method of his mentor, Benjamin Graham, whose system was actuarially based.
Graham’s aim was to purchase undervalued common stocks of secondary companies “when they can be bought at two-thirds or less of their indicated value.”
He determined value solely by analyzing publicly available information, his primary source of information being company financial statements.
A company’s book value was his basic measure of intrinsic value. His ideal investment was a company that could be bought at a price significantly below its liquidation or break-up value.
But a stock may be cheap for a good reason. The industry may be in decline, the management may be incompetent, or a competitor may be selling a superior product that’s taking away all the company’s customers — to cite just a few possibilities. You’re unlikely to find this kind of information in a company’s annual report.
By just analyzing the numbers Graham could not know why the stock was cheap. So some of his purchases went bankrupt; some hardly moved from his purchase price; and some recovered to their intrinsic value and beyond. Graham rarely knew in advance which stock would fall into which category.
“What do Buffett and Soros have in common?”
What do Warren Buffett and George Soros have in common besides their self-made investment fortunes? Well, neither takes big risks or diversifies…. Instead, both are cautious investors who have learned how to protect their capital. Oh, and neither follows analyst reports—ever. — U.S. News & World Report
So how could he make money? He made sure he bought dozens of such stocks, so the profits on the stocks that went up far outweighed the losses on the others.
This is the actuarial approach to risk management. In the same way that an insurance company is willing to write fire insurance for all members of a particular class of risks, so Graham was willing to buy all members of a particular class of stocks.
An insurance company doesn’t know, specifically, whose house is going to burn down, but it can be pretty certain how often it’s going to have to pay for fire damage. In the same way, Graham didn’t know which of his stocks would go up. But he knew that, on average, a predictable percentage of the stocks he bought would go up.
An insurance company can only make money by selling insurance at the right price. Similarly, Graham had to buy at the right price; if he paid too much he would lose, not make, money.
The actuarial approach certainly lacks the romantic flavor of the stereotypical Master Investor who somehow, magically, only buys stocks that are going to go up. Yet it’s probably used by more successful investors than any other method. For success, it depends on identifying a narrow class of investments that, taken together, have a positive average profit expectancy.
Buffett started out this way, and still follows this approach when he engages in arbitrage transactions. It also contributes to Soros’s success; and is the basis of most commodity trading systems.
Average profit expectancy is the investor’s equivalent of the insurer’s actuarial tables. Hundreds of successful investment and trading systems are built on the identification of a class of events which, when repeatedly purchased over time, have a positive average expectancy of profit.
Most investors believe that the more risk you take on, the greater the profit you can expect.
The Master Investor, on the contrary, does not believe that risk and reward are related. By investing only when his expectancy of profit is positive, he assumes little or no risk at all.
“Warren may be as near to a genius at investing as I have observed.” — Paul A. Samuelson
“It was really to your benefit to talk to him [Soros] about it because he was smart.” — Allan Raphael
“He [Buffett] is the smartest man I have ever met, by a long shot.” — Rich Santulli
Clearly, both Soros and Buffett exhibit the hallmarks of genius. Both are investment pioneers; both developed their own original investment methods and applied them with outstanding success. Both are inventors and innovators, and could be considered the investment equivalents of Thomas Edison and Alexander Graham Bell.
Does this mean there should be a 24th Winning Habit: Be a Genius?
Perhaps — if you want to do everything that Buffett and Soros did, including inventing or perfecting an entirely new investment method.
But even if you do need to be a Thomas Edison to invent the light bulb, you don’t need to be a Thomas Edison to switch one on. Or to make one — after the genius has blazed the trail for the rest of us to follow. For investors, that trail is laid out in the mental habits and strategies that Buffett, Soros and other Master Investors all follow religiously.
As Buffett says, “You don’t need to be a rocket scientist. Investing is not a game where the guy with the 160 IQ beats the guy with the 130 IQ.”
Buffett and Soros share many other characteristics. They both live in the United States, they have similar political opinions (for example, both helped fund Hillary Clinton’s Senate bid), they are both male and wear glasses. None of these is relevant to their investment success.
Intriguingly, they have one other thing in common: neither has passed any of the many securities industry qualifications that employees of Wall Street firms are routinely required to take.
When Buffett became CEO of Salomon Brothers in 1991, “there was also a rule that because I was an officer of a securities firm I had to take the Series 7 exam [for stockbrokers],” he recalls. “I kept delaying it until I left because I wasn’t sure I could pass it.”
Earlier in his career, Soros actually took such an exam — and failed it miserably.
“There came a point when they introduced a certificate for security analysts, a sort of professional qualification. After avoiding it for a while I sat for the exam and I failed in every conceivable topic. At that point I told my assistant that he had to take it and pass it. As I understood it, the importance of the certificate would not start to matter for another six or seven years and by that time I would either be so far ahead that I wouldn’t need it, or I would be a failure, in which case, I also wouldn’t need it.”
When the world’s two greatest investors fail or are afraid to fail such professional exams, one wonders what the true value of these qualifications is. If neither Buffett nor Soros has them, you certainly don’t need them to achieve investment success. What you do need to do is follow the same mental habits and strategies as Warren Buffett and George Soros. continued…
“Masterful mapping of investment genius”
“Mark Tier’s mapping of investment genius is simply masterful — clean and true. What lifts his book even further above the rest, though, is his infectious delight in discovery and clarity of explanation as he hands you the attitudinal and behavioral keys to becoming the consummate investor.” — David Gordon, author, Expanding Your World: Modeling the Structure of Experience
“What we do is not beyond anybody else’s competence. It is just not necessary to do extraordinary things to get extraordinary results.” — Warren Buffett
When I mentioned to one woman that I was writing this book she asked me how many Winning Investment Habits there were. When I told her, she exclaimed, “Twenty-three! Why so many? Can’t you make it three?”
I’m afraid not, which may make adopting all the habits seem like a daunting proposition. The good news is that just by adopting a few of them you will immediately see an improvement in your investment results.
That’s what I did. I adopted a kind of cross between Benjamin Graham’s and Warren Buffett’s systems, buying Hong Kong-listed stocks in well-managed companies with low P/Es and high yields. One of these companies turned out to be more poorly managed than I could have ever imagined. It was eventually delisted and I suffered a total loss. But I didn’t take it personally. I learnt from the error and moved on.
When everyone else was getting rich in dot-com stocks, I wasn’t tempted. I stuck to my system. Nevertheless, I had one bonus from the internet boom. I bought shares in a company that rented the exhibition booths at trade shows and the like. One day I noticed that the stock had doubled since I’d last checked the price a week or so before. Unfortunately, I also noticed that a couple of days before it had been even higher.
I did some digging and quickly discovered the stock had soared because the company was having discussions — just talking! — with an American outfit about somehow putting its business onto the internet. So I immediately called my broker and told her to dump the stock. It was obvious to me this was like winning the lottery, a windfall gain. Sure enough, a few months later the stock had fallen to less than I’d originally paid for it.
But I can’t claim that I have always acted instantly like I did then. Far from it.
I’d owned a stock for a while because it had a 25% dividend yield (that is not a typographical error). But the company’s business fell off as the economy soured and it cut its dividend. This happened while my mental focus was on finishing this book, so I procrastinated for quite some time before selling the stock for far less than I’d have gotten if I’d acted immediately.
Despite my far-from-perfect record in practicing the 23 Winning Investment Habits, I still banked an average 24.4% annual return on my Hong Kong stock portfolio for the five years from 1998 to 2002.
But improving your performance isn’t the only benefit you can expect from adopting the Winning Investment Habits. You’ll also be far more relaxed when making investment decisions. You may even find the process of investing now contributes to your peace of mind rather than being a source of anxiety. You’ll no longer view the successes of others with a sense of envy, bewilderment or self-doubt. Rather, you’ll probably react by thinking something like, “Well, that’s an interesting way of investing…but it’s not for me.” You’ll no longer be on an emotional roller coaster governed by the manic-depressive changes in Mr. Market’s mood.
The financial media is dominated by the belief that the only way to make money is to predict the market’s next move — the first Deadly Investment Sin. Having purged those beliefs from your mind, you may find yourself wondering whether you really need to continue reading the Wall Street Journal every day. Or maybe you’ll find it a regular source of amusement, as I do — and wonder why you ever wasted your time watching those financial TV channels.
By adopting these habits you’ll develop your own way of looking at the markets, and of doing things, that will separate you once and for all from the investment herd.
“Tier has written an excellent book. His chapter on exit strategies alone (knowing when to sell even before you buy) is worth the price of the book.” — Dr. Mark Skousen, editor, Forecasts & Strategies.
— Richard Russell, editor, Dow Theory Letters
“The world is full of get-rich-quick schemes, but this definitely isn’t one of them.”
“Instead, Tier teaches readers to invest smartly by delving into the skills, philosophies and investment strategies of some of the world’s richest self-made men — Warren Buffett (Berkshire Hathaway, Inc.), Carl Icahn (Ichan & Co.) and George Soros (Quantum Fund) among them.”
— Publishers Weekly
“Based on a stunningly simple idea…”
“This book is based on a stunningly simple, but highly intelligent and effective idea: Analyze the methods of Buffett and Soros – probably the two most successful investors of our time — and see exactly why they’re so successful. Everybody talks about these guys, but it’s rare to find a good, thorough analysis of why they’ve done so well. Tier’s approach is especially valuable because Soros’s and Buffett’s methods are often so different — yet, as Tier shows, the keys to their success are amazingly similar. Great book —something I rarely say about this genre.”
— Doug Casey, editor, International Speculator
“Exciting investment book”
“One of the most exciting investment books to come down the pike in a while.”
— Laissez Faire Books Review
“Gets to the essential reasons for the successes of Soros and Buffett better than any other book”
“Tier’s book is a great read, and I recommend it. It gets to the essential reasons for the investment successes of Soros and Buffett better than any other book I have read. More important, it can get you to thinking about how you can apply their lessons and reasons to your own investment approach, even if you have a modest amount of money.”
— Chris Weber, editor, The Weber Global Opportunities Report
“Stands out from the normal run of How-To-Get-Rich books”
—Jake van der Kamp, Asian Review of Books, Hong Kong
“What do Buffett and Soros have in common?”
What do Warren Buffett and George Soros have in common besides their self-made investment fortunes? Well, neither takes big risks or diversifies…. Instead, both are cautious investors who have learned how to protect their capital. Oh, and neither follows analyst reports—ever.
— U.S. News & World Report
“Neither Buffett nor Soros tries to pick the market. Nor do they diversify. They specialize, something advisers tell you not to do. They are also more focused on not losing money than making it. But the real revelation in The Winning Investment Habits Of Warren Buffett & George Soros is they spend far more time analyzing their mistakes than their successes. Soros once said recognizing his mistakes was the secret of his success.”
— Sun-Herald, Sydney
“Smorgasbord of investing wisdom“
“If you have even a small taste for profit, you might consider filling your plate from Tier’s smorgasbord of investing wisdom and indulging until your mind — and wallet — are full.”
— Angele McQuade, Better Investing magazine
“Readable and Informative“
“One of the most readable and informative investment books for a long time.”
— Lloyd’s List
“Same principles for real estate”
“Your book on Buffett and Soros is really very very good. There is something to think about on every page. I invest in real estate, but as you indicate, the principles are the same. You provide a significant methodology for me to confidently progress. As well as being outstandingly insightful it provides several important strategies that anyone could develop.”
— Vance Marcollo, Australia
“I’ve just finished reading The Winning Investment Habits of Warren Buffett and George Soros. I find it tremendously useful for a beginner like me, to start with a correct frame of mind. I am looking forward to finding and testing my own system.”
— Christina Siu, Sydney, Australia
“READS LIKE A THRILLER!”
— Peter Chen, Sydney, Australia
[* “40% return in first month…” *]
“By applying just the first two rules in the book, I have increased my investment returns in one month to 40% of my investment capital. I look forward to many more months of achieving similar returns as I analyze and apply the principles laid out in your book.”
— Greg Barnes, Auckland, New Zealand
“Showed my weak points”
“Loved your book on Buffett and Soros. It’s very well written, the ideas follow in a logical order, and my interest was held throughout the whole book. It jelled very well with me and showed me some of my weak points.”
— Gary Hannan, Sydney, Australia
“Improved my business”
“It’s really a pleasure to read, even for a non-native English speaker…. An unexpected effect is that I transposed some of the beliefs and habits to my business and made some dramatic — and profitable! — improvements.”
— Laurent Gounelle, Paris, France
“Clearly describes the habits you need to profit…”
“By far the best book written on the subject of investment habits. It clearly describes and explains the habits one would need to profit from the stock market. I would recommend this book to anyone who does not understands the phrase ‘Bulls make money, Bears make money, but Pigs get slaughtered!’”
— Reader’s review on yesasia.com
“Tripled my profit”
“I tripled my profit on the first investment I made after reading your book by following just ONE of your ‘23 habits.’ Your book is a brilliant piece of work and I commend you for it.”
— Don Palmer, Perth, Western Australia
“The best ideas in one book”
“I have read over 50 books on the market, and this one brings together some of the best ideas in one book. I found it to be well written, and was impressed with the notes and references. Mark Tier gives credit where credit is due. With this book you can definitely shorten up the learning curve.”
— Lisa Hyatt on Amazon.com
— Straits Times, Singapore
“Out of the box.”
“There are only three books on the recommended reading list for my business course — and The Winning Investment Habits of Warren Buffett & George Soros is one of them.”
— Bay Butler, University of California, Davis
“Masterful mapping of investment genius”
“Mark Tier’s mapping of investment genius is simply masterful — clean and true. What lifts his book even further above the rest, though, is his infectious delight in discovery and clarity of explanation as he hands you the attitudinal and behavioral keys to becoming the consummate investor.”
— David Gordon, author, Expanding Your World: Modeling the Structure of Experience
“Every chapter is packed with good, practical wisdom”
I have no intention of getting into the stock market, let alone currency trading, but the habits are still highly appropriate for my niche — property.”
— Stephen Greig, New Zealand
“A real page-turner. Fills in lots of gaps in my knowledge.”
— Hugh Butler, Salt Lake City, Utah
“The most important book on investing since Charles MacKay’s Extraordinary Popular Delusions and the Madness of Crowds.”
— Daniel Rosenthal, San Francisco, CA
“Wonderful style…totally lucid”
“I just finished reading your new book. What a beauty! You have a wonderful writing style, you are totally lucid, and you have mastered the art of not overloading the reader in any given chapter. I thoroughly enjoyed reading it, and I can’t imagine anyone putting it down once they open it.”
— Dan Greenberg, Framingham, Massachusetts
“For anyone who cares about their financial future”
“A great book, extremely well researched, and a very easy read. Definitely worth a read for anyone who cares about their financial future.”
– Terry Harcott, Vancouver, Canada.
“The common ‘threads between three investing legends”
“Mark Tier has taken it upon himself to extract the common threads between three investing legends — one speculator [Soros], one activist [Icahn] and the greatest value investor ever [Buffett]. You may be surprised at how many traits they share — both personally and professionally. I especially enjoyed learning about these investors in their own words.”
— Whitney Tilson, T2 Partners, New York.
“Greatly exceeds my expectations”
“I am something of a fan of investment books and am usually happy to be able to take at least one investment idea away from any book I buy. I have to say that your book was a surprise. Not only did it greatly exceed my expectations but it was a level or two above, not in difficulty but in its global applicability to the field of investment. Your book will feature in my top five, at least until your next one comes out.”
— Jeff Wicks, Hong Kong
“Tier has written an excellent book. His chapter on exit strategies alone (knowing when to sell even before you buy) is worth the price of the book.”
— Dr. Mark Skousen, editor, Forecasts & Strategies.
See more and read excerpts at http://marktier.com
  
  
Published August 2016 by Inverse Books,
GPO Box 9444, Hong Kong
Copyright © 2016 by Mark Tier. All rights reserved.
How To Make More Money By Sitting on Your Butt was first published in Creating Wealth, November 2015. © 2015 by Mark Tier
The Accountant’s Investment Edge was first published in Accountancy Age (UK), March 2006. © 2006 by Mark Tier
A Good Story—but a Good Investment?, Your Profit is “Virtually” Guaranteed, Using Scuttlebutt to Maximize Your Profits, Windfall Profits, and Contrary to “Contrary Opinion” first appeared on Mark Tier’s blog, Investor’s Edge. © Mark Tier 2005, 2006
Can you really make more money by just sitting on your butt? You bet you can. Indeed, if you're not a “butt-sitting” investor some of the time, you've increased your chances of losing money in the markets. As legendary trader Jesse Livermore put it: “It was never my thinking that made the big money for me, it always was sitting.” And George Soros: “When there’s nothing to do, do nothing.” And Warren Buffett spends most of his time “sitting on his butt”—reading annual reports. How you can make more money by just sitting on your butt is just one of the many "contrarian conclusions" you'll find in this free eBook. Conclusions I've usually come to the hard way: by losing money or missing out on a slam dunk opportunity. You’ll find some others in this “mini”-book, including— —Why diversification is one of the “7 Deadly Investment Sins” —How to avoid getting suckered by a stock’s “sizzle”—and focus on the steak (if there is any!) —Why, if there are any shortcuts to wealth, the much-touted “theory of contrary opinion” isn’t one of them Save yourself an expensive education by getting your copy of How to Make More Money By Sitting on Your Butt now. Happy (and profitable!) reading.