7 Simple Habits of the World's Best Investors

While bad habits get all the press, it's really their beneficial flip side we should focus on. Good habits are like superpowers that people forget they can have.

Many people realize that somewhere in our subconscious lurk automations -- mental patterns and rhythms that we execute regularly -- but few people realize just how significant those are. A 2007 study out of Duke University concluded that as many as 40% of our daily actions are deeply ingrained habits, not conscious decisions.

Yes, 40%.

Charles Duhigg's The Power of Habit not only confirms the massive presence of these invisible automations, but it also sheds light on how you can shift your habits to adopt better ones. Here's a cheat sheet.

After being fortunate enough to meet Duhigg, I thought about tracking down some better investing habits for myself. In this industry, it pays to look to those who have done it right before. Here are seven common habits I've identified among the world's best investors. 

1. They read. And read, and read, and read...
If you follow Warren Buffett and Berkshire Hathaway (NYSE: BRK-B  ) (NYSE: BRK-A  ) , you've probably stumbled across his witty and equally brilliant first mate, Charlie Munger. He's a legend for his insights into successful investing, thought processes, and habits. He nailed a crucial one here:

In my whole life, I have known no wise people who didn't read all the time -- none, zero. You'd be amazed at how much Warren reads -- at how much I read. My children laugh at me. They think I'm a book with a couple of legs sticking out.

2. They seek and demonstrate humility
Koch Industries may not command the recognition of its phonetic relative Coke, but it should. Koch is the second-largest private company in the United States and rakes in more than twice the revenue as the more familiar beverage-maker.

Koch Industries CFO Steve Feilmeier is in charge of deploying the company's massive capital at a reasonable rate of return. He also sits on the board of the company that manages Koch's pension investments. When discussing what he looks for in a valuable acquisition for Koch, he said, according to Graham and Doddsville Issue 19: "There is one in particular that I pay attention to when we're looking at another company, and that is humility."

Humility can be a rare virtue in an industry controlled by animal spirits, but it pays off. Without enough of it, you can overleverage and blow up, a la Long Term Capital Management. Even if you're fortunate enough to pick yourself up from the aftermath, without humility you won't learn from your mistakes and see that history repeats itself.

3. They fail
Babe Ruth was arguably one of the greatest baseball players ever to live, hitting a monster 714 home runs over his career. He also struck out nearly twice as much. Fortunately, the best investors can do slightly better than that -- but maybe not as much as you'd think.  

Peter Lynch, the legendary manager of Fidelity's Magellan Fund, absolutely stomped the market over his career, averaging annual returns of 29%. Here's what he had to say on picking winners: "In this business, if you're good, you're right six times out of 10. You're never going to be right nine times out of 10."

That's right. If you're king of the investing mountain, you may narrowly beat a coin toss in the long run.

4. They steal
OK, maybe "steal" isn't the best word for it. In investing it's called "cloning," or basically borrowing already great investment ideas and making them your own. 

When it comes to cloning, no one is a bigger advocate than Mohnish Pabrai -- and few are so successful at it. Pabrai has targeted a 26% annual return in his fund since inception. After managing his fund for more than 18 years and weathering two recessions, he's at 25.7%.

Pabrai has been kind enough to distill his own approach for us to learn from. He breaks it down to three strategies, and one of them is, indeed, cloning. It's no coincidence that he has had this idea affirmed by someone else too: Charlie Munger.

5. They evaluate internally
A lot of investors are aware of the need to go against the grain to find success, but the judgment and evaluation of others can be a big psychological weight. It can cause doubt and insecurity in your approach.

Buffett knows this best. He was chastised for trailing the moonshot returns of the tech bubble while he stuck with boring insurance and paint manufacturers. His advice for weathering the storm? An inner scorecard. As he said in The Snowball:

The big question about how people behave is whether they've got an Inner Scorecard or an Outer Scorecard. It helps if you can be satisfied with an Inner Scorecard. ... If all the emphasis is on what the world's going to think about you, forgetting about how you really behave, you'll wind up with an Outer Scorecard.

Guy Spier, in Graham and Doddsville 19, offered an abbreviated version of the same idea: "It's about being the best version of yourself."

6. They practice patience
We got a wonderful reminder of the power of patience here at Fool HQ when David Gardner's 1997 recommendation of Amazon.com (NASDAQ: AMZN  ) became a 100-bagger. That return is absolutely stunning, but even more impressive is that David was an owner the whole way through.

AMZN Chart

AMZN data by YCharts.

That little blip to the left was the tech collapse. It doesn't seem so scary when you look with a decade-long lens. 

In his original write-up on picking Amazon, David wrote: "We're patient investors who buy with the idea of holding on to our latest pick for at least a year or two -- if not indefinitely."

He's still holding. Way to go, David. 

7. They're decisive
Don't confuse patience with indecision. The best investors are poised to act when the right opportunity comes across their radars.

John Paulson and Michael Burry didn't participate in The Greatest Trade Ever by sitting on their hands. When they saw a clear opportunity, they backed up the truck. For Burry, that often meant battling his own investors' anxiety. But, as he put it, "I bet against America and won."

That he did. His fund Scion Capital returned nearly 500% in less than eight years. 

Taking the time to cultivate good habits will yield incredible results. As one popular saying goes:

Your actions become your habits, 
Your habits become your values, 
Your values become your destiny.

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Read/Post Comments (15) | Recommend This Article (67)

Comments from our Foolish Readers

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  • Report this Comment On November 04, 2013, at 5:28 PM, TMFDanielSparks wrote:

    Solid, solid article. Thanks for taking the time to write this.

  • Report this Comment On November 04, 2013, at 8:51 PM, chris293 wrote:

    #2 Humility sounds like you looking for a business where the owners, bosses, or some management do not how valuable the business is. That goes along #4. 'they steal', in other words, these people have the ability to take good ideas or companies and make the most of them before anyone realizes what they have. Thanks for the patience of reading this.

  • Report this Comment On November 06, 2013, at 9:25 AM, TMFHousel wrote:

    Great article, Austin.

  • Report this Comment On November 06, 2013, at 10:10 AM, TMFPetra wrote:

    This is an awesome article!

    #2, #3 and #6 test the character of the investor. They are really hard to follow, but sets apart the best from the rest.

    Thanks Austin.

    -Isac

  • Report this Comment On November 06, 2013, at 10:28 AM, Becker2011 wrote:

    Enjoyed the article! Thanks

  • Report this Comment On November 06, 2013, at 10:30 AM, TMFBWItime wrote:

    Thanks guys! I'm glad you enjoyed it.

    Fool on!

  • Report this Comment On November 06, 2013, at 10:31 AM, Mathman6577 wrote:

    Good article.

  • Report this Comment On November 06, 2013, at 11:28 AM, monkeypro wrote:

    'Action -> Habit -> Values -> Destiny' <-- very well said. though I would preprend with 'Thought ->'

  • Report this Comment On November 06, 2013, at 11:54 AM, stillwater9999 wrote:

    I don't think that Buffett would be buying AMZN at the current price. Also do not think he has ever bought stock in this company.

  • Report this Comment On November 06, 2013, at 12:18 PM, bevantey wrote:

    Fantastic stuff, TMFBWItime. If only more folks out there could learn (or relearn) these attributes...

  • Report this Comment On November 06, 2013, at 1:08 PM, MartyTheCanuck wrote:

    stillwater

    It's not the point. Great investors have different methods that works for them. We can learn from David Gardner and Buffett and Lynch without having the same methods or buying the same stock. Many stocks will give you great returns over time, they can be start-ups, mature value stocks trading at a discount, secular growth companies, turnaround plays. They can all be seen as buying a business first and foremost. You have to find your way. But these habits will be helpful no matter your investing style.

  • Report this Comment On November 06, 2013, at 2:26 PM, hbofbyu wrote:

    “Sow a thought and you reap an action; sow an act and you reap a habit; sow a habit and you reap a character; sow a character and you reap a destiny.”

    ― Ralph Waldo Emerson

  • Report this Comment On November 06, 2013, at 2:40 PM, stillwater9999 wrote:

    But in my view some of these approaches are mutually contradictory, and some are just plain wrong. There is no one right way (Virginia Postrell) but there are many wrong ways.

    I follow Buffett/Lynch/Allmon.

    sw

  • Report this Comment On November 12, 2013, at 5:43 PM, whyaduck1128 wrote:

    All seven don't necessarily go together, but taken individually they can all be instructive.

    Personally, I follow Lynch's "don't buy what you don't understand" or "buy what you know", and I always ask myself when considering a company, "Does this investment make sense?" AND, "Do I WANT to own this company?"

    I'd like to think that I am not afraid to fail (#3) and that I am humble about my investments (#2) ( I have much about which to be humble!). Where I need to work is on #6, being patient. So many times I take a small, quick profit over the bigger, slower, longer-term one.

  • Report this Comment On November 13, 2013, at 3:28 PM, MDMDoyle wrote:

    I enjoyed this article. Simple (and insightful) reminders like this are time well spent compared to reading bias stock recommendations.\

    CD

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