Successful investors tend to buy what’s out of favor rather than what’s popular. They spend far more time reading things like business publications and financial reports than watching the ticker or television shows about the market.
Successful investors understand and profit from reversion to the mean rather than projecting the recent past indefinitely into the future. In the 1998 annual meeting of Berkshire Hathaway’s shareholders, Warren Buffett reminded, “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely.”
Successful investors focus on intrinsic company value and buy only when there is a substantial margin of safety, rather than trying to guess where the herd will go next. They Successful investors make their own decisions and are willing to be held accountable for them, not seeking safety in what everyone else is buying or decision making-by-committee.
Successful investors focus more on analyzing and understanding micro factors, such as a company’s margins and future growth prospects, and less on trying to predict the direction of interest rates, commodity prices or the overall economy. Successful investors admit their mistakes and seek constantly to learn from them. Warren Buffett once said, “The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.”
Successful investors cast a wide net, seeking mispriced securities across industries and types and sizes of companies rather than accepting artificial limitations on market capitalization or other criteria. Journalist Gary Strauss quoted Warren Buffett in his article “Buffett a Buddy to Targeted Firms” on 9-Aug-1989 in the USA Today: “You do things when the opportunities come along. I’ve had periods in my life when I’ve had a bundle of ideas come along, and I’ve had long dry spells. If I get an idea next week, I’ll do something. If not, I won’t do a damn thing.”
Successful investors focus on avoiding permanent losses and on absolute returns, rather than outperforming a benchmark. Successful investors understand that beating the market requires a portfolio that looks different from the market. In Berkshire Hathaway’s 2005 Chairman’s letter and annual report, Warren Buffett wrote,
Long ago, Sir Isaac Newton gave us three laws of motion, which were the work of genius. But Sir Isaac’s talents didn’t extend to investing: He lost a bundle in the South Sea Bubble, explaining later, “I can calculate the movement of the stars, but not the madness of men.” If he had not been traumatized by this loss, Sir Isaac might well have gone on to discover the Fourth Law of Motion: “For investors as a whole, returns decrease as motion increases.”
Successful investors pride themselves on in-depth and proprietary analysis in search of “variant perceptions,” rather than acting on tips or relying on Wall Street analysts. Successful investors typically invest with a multi-year time horizon rather than focusing on the month or quarter ahead.
Recommended Reading on Warren Buffett & Value Investing
- ‘Buffett Beyond Value: Why Warren Buffett Looks to Growth and Management When Investing’ by Prem C. Jain
- ‘The Tao of Warren Buffett: Warren Buffett’s Words of Wisdom: Quotations and Interpretations to Help Guide You to Billionaire Wealth and Enlightened Business Management’ by Mary Buffett, David Clark
- ‘Warren Buffett on Business: Principles from the Sage of Omaha ‘ by Richard J. Connors
- ‘The Snowball: Warren Buffett and the Business of Life’ by Alice Schroeder