First published at The Motley Fool.co.uk.
Every investor sets out with the goal of trying to beat the market. A few even dare to think that they can become next Warren Buffett. Unfortunately, the harsh reality is that few manage to even come close to this goal.
Nevertheless, you can improve your chances of success. There’s no sure-fire strategy to riches, but by studying the world’s most successful investors we can pick up a few tips to help improve our chances.
1. Have a strategy
Arguably the most important trait of the world’s greatest investors is the ability to set out with, and stick to, a clear strategy.
It doesn’t matter which approach you choose, whether it be growth, value, income, deep value, distressed investing, momentum investing or day trading, whichever route you go down, it is key that you stick with the strategy.
Almost all of the world’s most successful investors, the like of Peter Lynch, Warren Buffett, John Templeton, Neil Woodford and Charlie Munger have all stuck with one strategy throughout both the good times and the bad.
2. Never stop learning
“If you stop learning, the world rushes right by you.” — Charlie Munger
Charlie Munger, Warren Buffett’s right-hand man, is arguably one of the most influential investors of all time. It’s his philosophy that investors should never stop learning, and they should always seek to improve existing skills.
Research has shown that for anyone to truly become an expert at something, it takes 10,000 hours of practice. The only way to reach this goal is to continually seek out new information.
Charlie and Warren always read for several hours each day to increase what Charlie has called their “worldly wisdom”.
3. Ask what could go wrong, not what could go right
Most investors invest with the wrong frame of mind. Indeed, when assessing an investment, most will as “what’s the upside here?” or “how much can I make?”
But in most cases, investors should constantly be asking “how much can I lose?”
This is the advice of the world’s most prominent hedge fund manager, Ray Dalio. Overseeing $170bn of client money, Ray Dalio’s fund Bridgewater has only lost money in three of the past 30 years — an unbeaten record.
Dalio attributes his success to the fact that he’s terrible at making decisions. He’s always looking for someone to shoot a hole in his theses and tell him that he is wrong. Being overconfident in this business can cost you a lot of money.
4. Know your strengths
Everyone has their own strengths, and weakness. Each investor has a company or sector that understand more than most.
It’s important that you invest inside your circle of competence. There’s no faster way to lose money than investing in something you don’t understand. If you can’t figure out what a company does or how it makes money, it’s often best to stay away, no matter how lucrative the opportunity might be.
5. Admit your mistakes
At one point in time, every investor has made a mistake. It’s just part of the business. The best way to act on a mistake it to accept it, learn from the mistake and move on.
“There’s no way that you can live an adequate life without many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke.” — Charlie Munger