It’s not necessarily the smartest or most knowledgeable men and women who earn the highest investment returns.
It’s the ones with the most wisdom and experience.
I’ve spent more than 35 years studying the world’s best investors. And while they used various methods to achieve their success, they tended to have the same core principles.
Here are five of them…
No. 1: They take smart risks, not extraordinary risks.
Risk and return generally go hand in hand. Take very low (or very few) risks and your returns will be low as well. But the key to earning extraordinary returns is not taking extraordinary risks. (Dogecoin investors, take note.) Extraordinary risks – options, futures, penny stocks, cryptocurrencies, etc. – can quickly send a portfolio up in flames. Extraordinary returns, on the other hand, are the result of consistently applying proven principles and strategies. The world’s wealthiest individuals don’t work longer and harder than everyone else. They compound their money at a high rate over a long period of time. That’s true of Elon Musk, Jeff Bezos, Bill Gates and, of course, Warren Buffett.
No. 2: They keep their costs low.
In most areas of life, you get what you pay for. In the world of investing, you get what you don’t pay for. What someone else is collecting in commissions, management fees, wrap fees, 12b-1 fees, front- and back-end loads, and surrender penalties on your portfolio reduces your real-world returns by that much. Management fees have been coming down for years. Trading costs at most discount brokerages are now zero. Yet there are still lots of products sold on Wall Street to unwary investors that are laden with hidden charges and fees. Give them a miss. The goal is for you to get rich, not your financial advisor.
No. 3: They are prepared for setbacks and losses.
Things come out of left field every once in a while – and they can’t be predicted in advance. Great investors know this and are prepared for the unexpected. Even when the market is doing well, there are ideas that won’t pan out. As mutual fund great Peter Lynch said, “You get a lot of A’s and B’s in school. In the stock market, you get a lot of F’s. And if you’re right six or seven times out of ten, you’re very good.”
No. 4: They are intellectual mavericks.
Great investors are not afraid to question or defy conventional wisdom. They don’t care about the prevailing narrative. They don’t care whether other people agree or disagree with them. They profit from the misperceptions and mistakes of those who think less rationally, rigorously or objectively. Many of the best investors have an almost Asperger’s-like emotional detachment from market volatility. When others are enthusiastically buying, they are content to sell to them. And when others are despondently selling, they are happy to offer a bid.
No. 5: They seek what the economist John Maynard Keynes called “worldly wisdom.”
You might imagine that the best investment ideas come from studying balance sheets and earnings reports. And some do. But great investors are an idiosyncratic breed who are willing to consider anything that might give them an edge: psychology, history, geography, economics, science, philosophy or politics, to name just a few. Buffett’s partner Charlie Munger once remarked, “I observe what works and what doesn’t and why.” That’s a pithy way of saying the best investors consciously and consistently seek any advantage that will maximize their odds of success.