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Wealth Building Secrets of the Master Investors

There are really no ?secrets? about how to invest successfully. There are lots of good ideas out there in plain sight ? in books, newsletters, magazines and more ? and you can acquire them cheaply.

The problem is there are also lots of really bad ideas about investing out there too. Most people can?t tell the difference between the two. This makes it hard to create a winning investment strategy. It would be like trying to make apple pie without knowing a ripe apple from a rotten one. That?s problem No. 1.

The second difficulty is that even when you find the genuine article ? a timeless bit of investing wisdom ? it is not something you can use to great effect in isolation. In other words, the ?secret? to creating a successful investing strategy is about combining great ideas with other great ideas. Knowing one idea is like having a 16-step recipe and knowing only step No. 6. You need to know all that goes around that to make it work well.

Finally, there are a lot of great recipes. Meaning, there are many great investors who have made fortunes in a number of different ways. Some of these recipes are relatively simple, and some are rather intricate. In any event, this just makes it harder for the aspiring master investor to figure out what on earth to do.

Given all this, creating a profitable investment philosophy appears daunting. Yet there are some winning habits that underlie nearly all the great investors. Plus, there are some basic observations that should be useful for anyone trying to work out what recipe to follow or those trying to make their own recipes.

One book I read recently inspired the thoughts that make up this last section: Becoming Rich, by Mark Tier, published last year.

Tier begins with a sound premise, one that I use myself in studying investing. It is simply that he starts by studying the greatest investors. This immediately limits the field. It eliminates the talking heads on television and radio and wipes out the authors of most books and magazine articles.

The greatest investors have long track records, measured in decades. (And don?t limit yourself to the living ? I?ve learned many things from studying the dead investors of long ago.) The subtitle of his book is The Wealth-Building Secrets of the World?s Master Investors Buffett, Icahn, Soros. This gives you some idea of his method.

The book is mainly about Buffett and Soros, two great investors that likely need no introduction. Tier?s book walks you through 23 winning investment habits (as well as seven deadly investment sins) that he maintains all the great investors he?s studied share. Let?s go through some. Perhaps you can add these to your repertoire and start seeing immediate results:

Bet Big: In the hands of some novice investors, this advice is financial suicide. But the fact remains that many of the great investors got that way by making big bets on their favourite ideas, instead of spreading out their money over many smaller positions.

There is a great story about George Soros that Tier relates. A trader has put on a successful trade, and Soros asks him how big his position was. ?$1 billion,? the trader confidently reports. Soros? next comment has since become part of Wall Street lore. Soros said: ?You call that a position?? and encouraged the trader to double his position.

Making big bets goes counter to mainstream financial advice, which encourages balanced portfolios with a little bit in shares and bonds, diversified across sectors, etc. Yet such diversification only prevents you from losing a lot of money. No one ever got rich following a great diversification strategy.

Of course, betting big without having a well-thought out investment strategy is probably a recipe for disaster. You need more than just this single idea ? which gets back to what I was saying about great ideas working in combination. That?s what Profit Watch Recommends and the team behind it is all about. Anyway, let?s go through a few more ideas.

Start with the As: One of my favourite Buffett anecdotes in the book is when a reporter asks Buffett where he gets his investment ideas. He replies that he reads annual reports and learns about every company in the United States with publicly traded securities. ?But there are 27,000 public companies,? the reporter responds. ?Well,? replied Buffett, ?start with the A’s.?

The great part of this story is that it illustrates how diligent great investors are. They are constantly searching for new investment ideas. And the scope of their search is extensive. You have to read a lot and read widely.

When there?s nothing to do ? do nothing: ?You don?t get paid for activity,? Buffett once told shareholders at his annual meeting. ?You only get paid for being right.? If there were one thing I would tell an aspiring investor, it would be this: Learn when to do nothing.

Don?t invest just because you have the cash. Let the opportunities drive your buy decisions. As Jim Rogers (of Investment Biker fame and once a partner of George Soros) puts it, ?One of the best rules anybody can learn about investing is to do nothing, absolutely nothing, unless there is something to do.?

The average investor feels like he has to be doing something. As Tier writes, ?Waiting is alien to his mentality because, without criteria, he has no idea what to wait for.? Master Investors, according to Tier, are like gold prospectors. They know exactly what they are looking for ? and they keep searching until they find gold.

Know when to sell: Most investors seem to have little idea about when to sell. They sell when their stocks go up in price. They sell when they go down. There is little else to guide the sell decision other than emotion and stock price changes. As Seth Klarman, head of the long-time super-performing Baupost Group, writes: ?Value in relation to price, and not price alone, must determine your investment decisions.?

Buffett sells under three conditions. First, if the business is broken in some way and no longer meets his criteria. Second, if he needs the money to fund an even better opportunity (something he hasn?t had to do in many years, since he has been in the position of having
more cash than good ideas). Third, he?ll sell if he realizes he?s made a mistake.

Tier goes through other examples of possible sell strategies, but for the long-term investor ? who studies and invests by the fundamentals of a business ? Buffett?s rules are the best.

Master the craft: ?I have enjoyed the process [of making money] far more than the proceeds,? Buffett once wrote, ?though I have learned to live with those also.? Ever wonder what could motivate a billionaire investor to keep going long after he?s already made his fortune? Tier finds that the great investors are emotionally involved and get satisfaction from the process of investing.

?For many successful investors,? Tier writes, ?the most rewarding and exciting part of the process is the search, not the investment he eventually finds.? He quotes one investor as saying, ?Investing is like a giant treasure hunt. I love the hunt.?

So the final and great irony in all of this is that to get rich, you have to love the game. When the money doesn?t matter so much is when the money comes. Life works in funny ways. And investing is no different.

Frank Hemsley is Head of the Profit Watch Group.

Frank Hemsley is Head of the Profit Watch Group.