Reuters blogger Felix Salmon recently posted a video arguing against attending meetings like the Ira Sohn conference in New York — an annual gathering in which some of the world's richest hedge fund managers talk about themselves and share an investing idea or two.
These people are just talking up their books, says Salmon. Sales pitches. Infomercials. As he puts it: "If you want to go there and spend your money and eat, like, rubber chicken, and rub shoulders with plutocrats, then all power to you. But don't pretend that you're doing this for your investment portfolio."
Joe Weisenthal of Business Insider came back with a thoughtful rebuttal. Chasing stock tips might be futile, he said, but "It's not often that you get to hear the thought process and reasoning employed by these financial professionals."
The value of the meetings doesn't lie in the stock pitches, but in learning what kind of people successful investors are. How do they work? What do they read? Where do they get their ideas?
Here are seven common traits we've noticed among some of the world's best investors.
1. They learn from each other
Look at what other respected money managers are buying and selling.
Famed U.S. value investor Mohnish Pabrai says he spends a good amount of time poring over the holding of other respected investors in search of investment ideas.
"I rarely use computer screens to find ideas," he said last year.
Here in Australia, managed funds produce a monthly factsheet. Although many under-perform the returns of an index tracker, some do stand out.
The Perennial Value Australian Shares Trust has soundly beaten the market since its March 2000 inception.
In its most recent commentary, the Trust lists its top 10 holdings, where you can see it's overweight Telstra (ASX: TLS) and ANZ Banking Group (ASX: ANZ), and describes how it has increased its holdings in National Australia Bank (ASX: NAB) and Foster's Group (ASX: FGL) whilst taking profits in Equinox Minerals (ASX: EQN) and BHP Billiton (ASX: BHP).
2. They use checklists
People usually screw up because either they don't know what they're doing, or what they're doing is so complex that they become forgetful. The airline industry has nearly eliminated the latter with a simple tool: checklists. The rate of human error in airline accidents fell precipitously after Boeing introduced pilot checklists in the middle of the 20th century.
Great investors are starting to catch on — an outgrowth of Atul Gawande's excellent book The Checklist Manifesto. Several now use investment checklists before making new investments in an attempt to eliminate errors.
3. They don't watch CNBC or Sky News Business
And if they do, it's on mute. Great investors tune out the noise. To take a dig at our own profession, the majority of financial news and analysis is not only useless, but dangerous, capable of swaying sound logic with fear and hype.
Black Swan author Nassim Nicholas Taleb put it best: "The calamity of the information age is that the toxicity of data increases much faster than its benefits."
4. They aren't slaves to the calendar
Investors who bought Woolworths (ASX: WOW) a year ago are sitting on a 2% capital loss. It's not a great investment return, for sure, especially when you compare it the 340% return of rare earths favourite Lynas Corportation (ASX: LYC) over the same period.
But, private investors can wait.
Hedge and managed funds don't have that same luxury. Clients want monthly, weekly, and sometimes daily trading reports. He can't wait. They need results now.
This slave-to-the-calendar mentality is one of the surest roads to mediocrity, if not ruin. The greatest investors make it clear that they won't sacrifice long-term performance for short-term window dressing. Why would they? They're out to earn as much as possible.
Google's IPO prospectus has a great quote: "A management team distracted by a series of short term targets is as pointless as a dieter stepping on a scale every half hour."
5. They're diverse learners
Warren Buffett's sidekick Charlie Munger likes to talk about worldly wisdom — mental models collected from diverse disciplines, entwined together to solve problems. It's the only way around the classic man–with-only-a-hammer-sees-every-problem-as-a-nail dilemma.
It's also vital in investing. The biggest challenges money managers come across have nothing to do with finance. Psychology, cognitive biases, geopolitics, engineering, history, and even anthropology can be some of the most practical skill sets.
Barry Ritholtz of Fusion IQ wrote a great op-ed in The Washington Post regarding "five fields that are hugely helpful to asset management." Ritholz lists historians, psychiatrists, trial lawyers, mathematicians and statisticians, and accountants. Anything but an MBA, really.
6. They focus on their mistakes more than their successes
Every investor will inevitably make mistakes. What happens afterward distinguishes the hacks from the pros.
Pabrai, mentioned above, spends more time at his annual meeting explaining what he did wrong than what went well, even in years when his returns are off the charts.
His investors love the humility, and most importantly, he learns from the mistake (adding it to his checklist!) to prevent recurrences. Those who bury and ignore mistakes are bound to repeat them.
7. They're small
Berkshire Hathaway is the best example. One of the largest investment funds in the world is run by two people: Warren Buffett and Charlie Munger.
This skeleton-crew setup is actually common among great investors. Some of the world's best investment funds often consist of a manager, a secretary, and an accountant. That's it.
That's all you need, really. Funds that employ legions of analysts and lawyers are usually doing really complicated things, increasing the odds that something terrible will happen. Investing isn't a game in which 100 junior analysts beat one seasoned, emotionally stable investor.
Quite the opposite, actually.
This article, written by Morgal Housel, was originally published on Fool.com. Bruce Jackson, who has an interest in Telstra, ANZ, NAB, Fosters, BHP, Woolworths, Google and Berkshire Hathaway (and clearly needs to get out more) has updated it. The Fool has a phenomenal policy.