How to Invest Like the 5 Best Investors of All Time

Quotes describing how to invest

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Mar 15, 2018
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The five investors I’ve picked out are Peter Lynch, Warren Buffett (Trades, Portfolio), Charlie Munger (Trades, Portfolio), Carl Icahn (Trades, Portfolio) and George Soros (Trades, Portfolio). The reason why I’ve included Icahn and Soros is that I wanted to give a bit more of a diversified insight rather than focusing only on value.

George Soros (Trades, Portfolio) is first up:

"The financial markets generally are unpredictable... The idea that you can actually predict what's going to happen contradicts my way of looking at the market."

Even though this quote is short, its meaning should not be underestimated. Soros is describing his Theory of Reflexivity, the idea that markets behave in a totally irrational way that’s driven, in some part, by a self-reinforcing cycle. Irrational behavior drives more irrational behavior. Soros provided a further explanation in an article in the Financial Times:

“I can state the core idea in two relatively simple propositions. One is that in situations that have thinking participants, the participants’ view of the world is always partial and distorted. That is the principle of fallibility. The other is that these distorted views can influence the situation to which they relate because false views lead to inappropriate actions. That is the principle of reflexivity.”

Put simply, markets are unpredictable and absurd, which is why you should only invest in stocks that you know and understand well, as Peter Lynch once said:

“If you’re prepared to invest in a company, then you ought to be able to explain why in simple language that a fifth grader could understand, and quickly enough so the fifth grader won’t get bored.”

The best way to reduce risk is to understand what you’re getting into. If you don’t understand the business, you dramatically increase your risk of making a mistake and losing money. If you can’t describe why you bought a stock in simple terms, then it’s more than likely that you don’t know enough about why you bought it. Under every share there’s a substantial business, as described by Carl Icahn (Trades, Portfolio):

“I look at companies as businesses, while Wall Street analysts look for quarterly earnings performance. I buy assets and potential productivity. Wall Street buys earnings, so they miss a lot of things that I see in certain situations.”

For investors like Icahn, who can take a long-term view on investments, the quarterly Wall Street earnings parade makes no sense. An investor with a long-term focus on the underlying business will be able to past one lousy quarter and see things short-term analysts may not. Almost all of Warren Buffett (Trades, Portfolio)’s success can be attributed to his ability to look past near-term headwinds and invest for the long term.

“Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

It is essential to look past the day-to-day gyrations of the market and invest in a company’s ability to generate earnings way out into the future.

If you focus on this, the risk that you’ll be influenced by sudden market shocks that push you to make a detrimental trading decision is significantly reduced. However, while keeping a long-term focus, you must also be prepared to change your mind and consider investment arguments from both sides, something Charlie Munger (Trades, Portfolio) is well aware of:

“We all are learning, modifying, or destroying ideas all the time. Rapid destruction of your ideas when the time is right is one of the most valuable qualities you can acquire. You must force yourself to consider arguments on the other side.”

Don’t be afraid to be wrong. Figure out what went wrong, learn from the mistake and move on.

To sum up these quotes: You need to acknowledge that markets are unpredictable, seek to know as much as possible about the companies you buy, focus on a business’ long-term potential, invest only in companies that are positioned to succeed for decades and always be prepared to learn. If you follow these five simple tips, you should have a successful investing career.

Disclosure: The author owns no share mentioned.