The Winning Investment Habits of Warren Buffett and George Soros

AFTERWORD

Where to Get Help

IF YOU WANT TO LEARN more about Becoming Rich, I publish an e-mail newsletter that will help you get started and keep going.

Like this book, the newsletter aims to help you practice the Winning Investment Habits yourself. It’s available only by e-mail to keep “transactions costs” down—both yours and mine.

To browse some past issues, go to www.marktier.com. You’ll find:

• My market commentary—something quite different from what you might expect. For example, don’t expect me to make any predictions about the market or give you any advice about what to buy or sell.

• Problems and obstacles other people have had adopting the Winning Investment Habits—and how they solved them. Learning from other people’s mistakes is a great shortcut to success.

• You’ll also have the opportunity to raise your own questions and concerns and get my suggestions on what to do.

Again, to learn more, and browse some past issues, just go to my Web site: www.marktier.com.

I’ll also post information there on when and where I’ll be giving courses, seminars, and other talks. I’ll be offering these all over the world, so there’s bound to be something happening somewhere near you soon.

Attention: Money Managers, Financial Advisors, Institutional Investors, and Other Investment Professionals

Readers of this book will turn into very demanding customers. And they’ll put you on the spot by asking you all kinds of difficult questions as they decide whether you’re really the right people to look after their hard-earned money.

Get a head start—and a jump on your competitors—by getting Mark Tier to help you install a culture of investment excellence in your organization.

Find out more at www.marktier.com/4managers.htm

And you can also …

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You’ll get a detailed inventory of your investment strengths and weaknesses and personalized advice on what steps you need to take to adopt the Winning Investment Habits—to quickly start to improve your investment performance.

Discover your investment personality at www.marktier.com/ipp.htm.

Investment Books Worth Reading

There are thousands of investment books available—with dozens more being issued every month. Some of them are worth reading.

Here are the books that I’ve found very helpful. They also expand on some aspects of the material in this book.

The Seven Deadly Investment Sins

If you’re afflicted by a belief in any of the Seven Deadly Investment Sins, I implore you to read The Fortune Sellers by William A. Sherden. Sherden does more than just survey the whole gamut of fortune sellers, from weather forecasters to economists to market gurus. He measures their predictions against what he calls the “naïve forecast.”

The naïve forecast is simply: Tomorrow’s weather will be the same as today’s; inflation next year will be the same as it was this year; next year’s earnings will be up (or down) X percent, just like they were this year. And so on.

Through rigorous analysis, Sherden shows that only one class of forecasters beats the naïve forecast with any regularity: weather forecasters. But only for forecasts for up to four days in the future. And even then, by only a small margin.

So next time you’re tempted to listen to some guru’s market prediction, remember that you can beat any guru—on average—by simply “predicting” that the market will do tomorrow what it did today. Sherden proves this in his book.

And in his Why the Best-Laid Investment Plans Usually Go Wrong, Harry Browne has a wonderful collection of market and economic forecasts whose authors I’m sure wish they’d never written them.

The Seven Deadly Investment Sins need “powerful magic” to be exorcised—exactly what you’ll find in these two books.

Warren Buffett

Books about Warren Buffett are about as scarce as wheat fields in Nebraska. Unless you’re a Buffett junkie, the problem is what to read and what not to read?

By starting with Roger Lowenstein’s biography Buffett: The Making of an American Capitalist and then reading The Warren Buffett Way by Robert Hagstrom you’ll be introduced to both the man and his method.

To hear it straight from the horse’s mouth pick up a copy of The Essays of Warren Buffett, edited by Lawrence A. Cunningham. These are actually extracts from Buffett’s annual letters to his partners and shareholders, organized by topic.

Even better, read Buffett’s letters in full. You’ll find them, from 1977 to the present, at the Berkshire Hathaway Web site, www.berkshirehathaway.com.

Berkshire Hathaway has also reprinted Buffett’s letters to shareholders (1977 to 1995) in two volumes, available for $30 direct from Berkshire Hathaway, Inc., 1440 Kiewit Plaza, Omaha, Nebraska 68131.

If you want to delve deeper into Buffett’s method, I can highly recommend The Real Warren Buffett by James O’Loughlin.

Andrew Kilpatrick’s Of Permanent Value is a wonderful compilation of stories and anecdotes about Buffett’s experience, his investments, his hobbies, and his outlook on life (plus hundreds of pithy Buffett quips and quotes).

Reading Buffettology (by Mary Buffett and David Clark) will help you get a handle on Buffett’s investment system. But be warned: The authors oversimplify and attempt to provide a formula that encapsulates Buffett’s stock-picking ability. Oversimplification is a helpful way to start learning something. So if you read this book, remember to graduate beyond its formulaic approach before putting your money on the line.

One book you’ll do just fine without reading is Richard Simmons’s Warren Buffett Step-by-Step: An Investor’s Workbook. Like the authors of Buffettology, Simmons attempts to reduce Buffett’s system to a formula (and even produces an equation which he doesn’t adequately explain). Unlike Buffettology, it does not have the redeeming virtue of adding significantly to your understanding of Buffett’s methodology.

There are many other books on Warren Buffett—and I think I’ve read all of them. Here I’ve recommended the ones I think will allow you to cover the most ground most quickly.

George Soros

Far less, sad to say, has been written about George Soros, no doubt because both the man and his methods are far more complex and less accessible than is the case with Buffett.

The best introduction is Robert Slater’s (unauthorized) biography, Soros: The Life and Times of the World’s Greatest Investor. Slater emphasizes Soros’s investment methods and achievements, and it’s a great way to gain familiarity with his approach.

A more recent biography, Soros: The Life and Times of a Messianic Billionaire by Michael T. Kaufman, was written with full access to Soros and his papers. So it is a far deeper portrait of Soros, the man. And, as you’d expect, there’s a lot in Kaufman’s book that you won’t find in Slater’s. Kaufman also had greater access to Soros’s Open Society Foundations, so there’s more information on his charitable activities.

To really understand Soros’s investment methods, it’s essential to read his own writings. I suggest you start with Soros on Soros, which, given its interview format, is easier to digest than his book The Alchemy of Finance, which can be rough going at times—though definitely worth the effort.

Robert Slater also published a brief volume of what he perceived to be Soros’s twenty-four trading secrets, Invest First, Investigate Later. Though an excellent summary, much of the material is simply drawn from his biography of Soros.

Other Master Investors

It’s worth studying the methods of as many other Master Investors as you can find, especially if you discover that neither Buffett’s nor Soros’s approach fits you. Here are some suggestions:

Only one book has been written about Carl Icahn: King Icahn by Mark Stevens. It’s a fascinating journey into his mind and his methods.

Peter Lynch has written about his way of investing in several books, including One Up on Wall Street and Beating the Street.

Philip Fisher deserves a far higher profile than he has. I urge you to read his book Common Stocks and Uncommon Profits.

Benjamin Graham, of course, needs no introduction. His Intelligent Investor should be required reading for anyone planning to buy stocks. And if you’re really serious, pick up a copy of his classic Security Analysis as well.

Bernard Baruch is another legendary investor. James Grant wrote an excellent biography, Bernard Baruch: The Adventures of a Wall Street Legend.

A more obscure book that I can highly recommend is You Can Be a Stock Market Genius by Joel Greenblatt. The title still turns me off—but the book is well worth reading. It’s a wonderful reinforcement of the importance of specializing in your own investment niche.

John Train has several books profiling the methods of successful investors: The Midas Touch, The Money Masters, The New Money Masters, and Money Masters of Our Time. This is a great way of being introduced to a variety of different approaches, one or more of which you may want to study further.

Sir John Templeton is one of the investors whose methods he analyzed in The Money Masters (which is also included in Money Masters of Our Time). Templeton’s approach is also examined by Nikki Ross in her book Lessons from the Legends of Wall Street.

Investment Gurus by Peter J. Tanous is another useful book surveying a number of different investors.

In Market Wizards and New Market Wizards, Jack Schwager has done a sterling service by finding and interviewing some of the greatest traders of our generation. Traders talk far more about their systems, methodology, and thought processes than most investors do. As a result, even if the last thing you want to do is buy a futures contract, you’ll find these two books of interviews a valuable source of proven ideas for building and testing your own investment system.

Risk and Uncertainty

An understanding of risk and uncertainty is essential for investment success. Simply the best book on this topic I’ve ever seen is Fooled by Randomness by Nassim Nicholas Taleb.

Peter Bernstein has also written a classic on this topic: Against the Gods: The Remarkable Story of Risk. Though you’ll find this book has more of a historical emphasis, it will also (like Fooled by Randomness) open your eyes to the importance of understanding the laws of probability.

Probability

You simply can’t be a Master Investor if you don’t understand probability. Since a lot of probability theory is counterintuitive, this causes many people problems.

One way to overcome this obstacle is with a book called Conned Again, Watson by Colin Bruce. In a series of tales, Sherlock Holmes and his sidekick Dr. Watson solve a variety of crimes and other misdemeanors through Holmes’s understanding of the laws of chance. If your reaction to probability is like a kid’s reaction to castor oil (you know it’s good for you but you can’t stand it), here’s a sugar-coated solution.

Why Smart People Make Big Money Mistakes (and How to Correct Them) by Gary Belsky and Thomas Gilovich explains how our thought processes are often flawed when it comes to money and investing. A superficial understanding of probability is often a big part of the problem.

Possibly the best introduction to probability theory—best because it’s clearly presented—is Probability Without Tears by Derek Rowntree. Unfortunately, it’s out of print—but you can probably find a used copy on eBay or Amazon.com.

Trading

If trading, rather than investing, is your calling, Van Tharp’s Trade Your Way to Financial Freedom is essential reading. Even nontraders can benefit enormously from this book. Tharp is a psychologist who specializes in helping traders overcome their mental blocks. Though designed for commodity traders, most of what Tharp has to say is equally applicable to investors. There’s excellent guidance on how to build a system, and an analysis of the importance and significance of position sizing I’ve not seen anywhere else.

Living Within Your Means

The Richest Man in Babylon by George Clason is the classic on this subject. Give it to your kids (after you have read it yourself).

In Rich Dad, Poor Dad Robert Kiyosaki shows how the amount of money you have in the bank is a direct consequence of your beliefs and behaviors. The rich are different—because the way they think about money is different.

Kiyosaki does much more than just show you the differences. You’ll also learn how you can start thinking about money the same way the rich do—and change your own fortunes as a result.

The Millionaire Next Door by Thomas Stanley and William Danko shows that the one thing millionaires who’ve kept their millions have in common is that they spend less than they earn.

Taxes

I’m no expert on taxes—and I neither need to be nor want to be. All I can say is that you should follow in Buffett’s and Soros’s footsteps and keep your taxes (and other transaction costs) as low as possible. So it’s essential to gain familiarity with the tax laws that affect you. The approach that I would follow if I were in your shoes is outlined by Terry Coxon in his book Keep What You Earn. You can also check www.passporttrust.com and www.yoot.info for details and information.

Transaction Costs

In Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors, a paper published in The Journal of Finance (Vol. 4, No. 2, April 2000), the authors Brad M. Barber and Terrance Odean showed that investors who traded stocks actively had, on average, a far lower return than investors who followed a buy-and-hold strategy.

They came to this conclusion by analyzing the performance of 66,465 accounts from a discount brokerage for the period 1991 to 1996. Though somewhat technical, it’s well worth reading. It’s available in PDF format from http://faculty.haas.berkeley.edu/odean/papers/returns/returns.html