7th March 2012
But the wisest strategy is not to copy what the gurus do, but how they think…
Investment gurus are well-known for taking a particular investment approach that goes against the grain – so it's not so much about what they choose to invest in, but their mindset when they do so.
As Psyfi blog says on Buffet: "He doesn't rely on the old arguments about what's important by drawing on existing ideas of what's salient, but develops new ones, based on his own models. He changes what's salient, and that's real gold for investors.
"…Finding these self-sufficient mechanisms for valuing assets of all kinds, unaffected by salience and existing frames, seems to be one of the key and central skills that Warren Buffett has brought to the task of investment. Somehow he's able to clear his mind of all of the information that biases the way the rest of us look at stocks and other assets and develop his own, independent, valuation metrics. He then applies these ruthlessly to determine whether or not to invest."
So he avoids group thinking and goes down his own path.
Don't rely on others to decide what's the next big investment, but do your own thinking to determine your strategy. Of course, this can be tricky without some guidance.
There are plenty of books to give you an idea of the theory behind a guru's strategy, giving you an idea of how they mind works.
The basics of the Billionaire financier George Soros's method of trading can be found in some of his books. The Alchemy of Finance (Wiley), for example, contains a detailed description of his trading methods.
One of Soros's pet theories is that financial markets do not tend towards equilibrium, as conventional theory would argue, but feed on their own misconceptions about events to produce exaggerated movements, which produce new misconceptions. This two-way feedback between perception and reality Soros describes as his theory of 'reflexivity'. It is, he claims, something that the shrewd investor can exploit by following the trend until it reaches the peak, and then, by identifying what Soros calls the 'inflexion point,' switching to the opposite tack.
Invent your own method
You need only develop a rough approach that you implement with hunches, says Forbes, to become your own investment guru. "However, along the way you write a couple of numerical ideas. For example, you could say that a stock's PE ratio should be below average. Put that into an equation…If you set up your equations in a spreadsheet, you have a "unique computerized analytical system."
If you blindly follow a guru, you could lose your ability to follow your own instinct – another useful investment too. Here the blog Cassandra Does Tokyo poses the question – Does your financial guru resemble a cult? She offers a simple test that will give you an idea whether what you thought was unbiased analysis is actually something more nefarious that wants to control your mind and your trades.
But there is no sure system
Kim Stephenson, Mindful Money's resident psychologist blogger, says: "If there is a formula for success every time nobody knows it – if they did, they'd win every time and nobody does.
"Nobody knows what works – Buffet has his ways of working out value (in the same way as other gurus like Peter Lynch did). They each have their own way, they sometimes get it right, sometimes they probably get it right (it was worth more) but it goes belly up anyway. Everybody says Betamax was better than VHS and that the Apple OS was better than Microsoft Dos – so what, if the market junks it, you still lose your money even if you were right. And sometimes Buffet, Lynch et al get it wrong (and sometimes, they are lucky anyway and still make money when they got it wrong – luck goes both ways)."
Spreading your bets may be simplest at the end of the day…
Buffet himself says:
"Most investors, both institutional and individual, will find that the best way to own common stocks [shares] is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals."
So simply setting up a diversified, indexed portfolio and ignoring the hype is another option aside from working out your own particular investment strategy.
Do you have any investment tips that work for you that you're willing to share?
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