Lessons From The Best Investors in the World

From Ed Thorp, John Templeton, Mohnish Pabrai, Howard Marks and more...

Good morning, friends!

I was listening to an AWESOME interview by William Green, author of Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life.

In this - may I say, exceptional - interview, William shared how some of the world’s most legendary investors think about investments; from what’s worked well for them, to how they deal with stress and how they recover from (at times public) failure.

To keep it simple, I’ll share my favourite six ideas on great investing practices. If you want to listen to the whole interview, click here.

Shall we get started?

1. Pursue Rational, Clear Thinking - Not Just Profits.

Most people believe investing is all about pursuing profits. But the best investors pursue something else: rational thought.

In a world that is so unknowable, they’re trying to act in a rational way to stack the odds in their favour. Plot twist though. They become tremendous pragmatists out of necessity.

“What kind of fascinated me was the idea that the greatest investors are an incredible filter for thinking about how to make rational decisions. And what actually occurred to me is the reason why they're such extraordinary decision makers, is because they have skin in the game. […]. If you're managing a billion dollars or $50 million, or $50 billion, or $100 billion - as some of the people I'm writing about do - there's an enormous cost if you're wrong. And also tremendous rewards if you're right. And so I think part of what happens is that the sheer amount of skin in the game forces them to be tremendous rational thinkers because there's such a price to pay if they're wrong.” - William Green

Part of thinking rationally also includes thinking probabilistically.

“He's always thinking, ‘what's the downside? What if I'm wrong - what's the downside there?’” - William Green

To think probabilistically, it becomes important to ask yourself what happens in the case you’re wrong? What are the consequence? What’s the chance of a catastrophe? Even if it doesn’t come naturally to them, great investors practice thinking in probabilities.

They’ll also take ideas from different fields (sports, science, mediation, psychology, etc.) in order to expand their points of reference and enhance their thinking.

2. Understand Where You Have an Edge.

Great investors understand where they have an edge and where they don't. Then they play the games were they can win.

“The great investors I've met have this tendency to stay in the games that they specifically can win.” - William Green

As an example he brings up Ed Thorp, who was not only an extraordinary hedge fund manager for not losing a quarter in 20 years (with his hedge fund); but also because he figured out how to count cards and beat the casino of blackjack.

“If you don't have a rational reason to think that you have an edge, then you’re almost certainly done.” - Ed Thorp.

Now, I put it back to you: do you have an edge in stocks, index funds, actively managed funds, or crypto?

If you do, perhaps consider playing in markets you’re likely to win and avoid playing in markets you’re not equipped to win. And if you want to take it a step further, consider doubling down on the positions where you are sure to win.

PS. This is most certainly NOT financial advice.

3. Making Your Own Investing Rules vs. Cloning Investors.

We all have different investing strategies.

Some of us like to imitate or clone our investing heroes. Others of us like to take inspiration. And others of us write the rules of our game. But which one is correct? Turns out, it’s a very nuanced question.

Investor, John Templeton, had grown up in a small town in Tennessee and he had seen people lose everything during the Great Depression.

In fact, while studying at Yale, his dad wrote to him to say he had no money to pay for John’s education. People were desperately selling their assets for cheap.

John didn’t have any investors to look up to or seek out for advice. But he still saw the opportunity to purchase assets at bargain prices… which is remarkable given the timing of the Great Depression and no one knowing what the future held.

His advice? Look for assets in places where people are desperate to sell because that's how you're going to make profits.

On the other hand, Mohnish Pabrai was an investor who grew up relatively poor in the outskirts of Mumbai, India. He went to the U.S. to study Electrical Engineering and later set up a tech consultancy.

One day, while waiting in the Heathrow Airport he found himself trying to make time pass by. He began reading up on Wall Street by Peter Lynch. That’s when he discovered Buffett's returns and thought:

“Wow, this guy's mastered the game of compounding. Let me reverse engineer what he did and figure out the rules of the game.” - Mohnish Pabrai.

Soon Mohnish was reverse engineering and cloning investors who happened to be the masters of the game that he was particularly suited to plan - and here’s where the nuance lies once again.

It’s not just about cloning investors who are smarter than you. Instead, it’s about taking ideas from people that actually suit your temperament, your talents and beliefs.

Otherwise, you may not have the conviction or the discipline to hold onto an asset that is temporarily depreciating (while they can) resulting in you losing more money than you can afford to lose. All because you and your hero were wired differently.

4. Don’t Overexpose Yourself.

Most of us are think: “how much money can I profit from this investment?” But investor Howard Marks asks a different question: “how much are you pushing the limits? Are you over-reaching?”

Are you over-leveraged and indebted? Do you understand how exposed you are?

“You have to live in a way where you're not overreaching so much that if this unknowable future turns against you, you're suddenly going to come down. Not only are you going to be forced to sell but you're not going to be able to handle the stress emotionally. So that idea of not pushing the limits is a really key aspect of survival and resilience.” - William Green

This does not mean you do not take risks. Quite the opposite.

“At a certain point, risk avoidance can become return avoidance.” - Howard Marks

If you are actually SO risk averse that you don't bet anything then you're hurting yourself. It’s all about intelligent risk taking, not the complete avoidance of risks.

5. Patience is the Name of the Game.

When we look at the great investors, most of them - if not all of them - had an extreme patience. They waited and waited and waited until the odds turned in their favour.

“And so, so it's a very nuanced question, how you weigh risk and how you think about the necessity of surviving by not pushing the limits too much. But then also recognizing that there are moments where suddenly the odds turn in your favour and you really need to grab those opportunities. So there's this strange kind of contradictory talent for both being very cautious and then suddenly turning extremely aggressive.”

William believes these savvy investors show a combination of extreme patience and then extreme aggressiveness and then they go back to doing nothing.

Which kind of reminds me of a lion… they wait, save their energy and then spend it all on a relentless hunt.

6. Keep It Simple.

In speaking to Joe Green, William learned that the best investors keep it simple.

For Joe it’s all about finding a business, valuing it and buying it for less. That’s it.

“Look, if it all comes down to this: all you're doing is valuing a business and then buying it for much less than it's worth. Everything else is, is really just nonsense, none of it matters. For example, if I'm buying the supermarket in the Midwest, why do I care if they're having a sovereign debt crisis in Greece? People are reading the newspaper and they're getting swept up in all of this news. It's actually totally irrelevant.” - Joe Green

Complicating a topic makes space for doubt, uncertainty and fear - ingredients that do not serve you in the world of investments. Your competitive advantage will be to simplify your entire investment strategy.

One Final Word

There’s a ton to learn from these amazing investors. And I’m so thankful to William for sharing them!

What I take away from this interview is that - again - it all comes down to good habits.

The investors at the top of their game keep their thinking sharp and clean. They think long term which puts them at ease in the short term. They ask themselves what the consequences are in case shit hits the fan. They display extreme patience. They understand that risk-taking is important to winning. And they play a game they are likely to win.

They do not blindly trust, or follow the next hot trend, or become easily swayed.

Ironically, to them investing seems more peaceful than it does stressful. If anything, it resembles more like quiet faith and conviction.

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