Five Lessons From Five Smart Investors

5 five

It’s not hard to imagine how frustrating it can be, especially for newer investors, to take someone at their word, only to later learn they were either certifiably clueless or fringe lunatics. There’s a lot of information, and even more ill-informed opinions, sloshing around out there. So what we can we do about it?

The best way to circumvent this is to pay special attention to advice given by those who are demonstrably successful at what they do. That’s pretty obvious. And finding these teachers is fairly easy in investing: Annual returns provide a universal yardstick that objectively distinguishes the truly great from the merely good from the average from the bad.

So here are five bits of timeless advice given by five investors who have proven to be among the greats.

1. Michael Mauboussin: “A thoughtful investment process contemplates both probability and payoffs and carefully considers where the consensus – as revealed by a price – may be wrong.”

Mauboussin is currently the managing director and head of Global Financial Strategies at Credit Suisse. Prior to that, he was the chief investment strategist at Legg Mason, a highly regarded asset management firm.

Besides having a storied CV as well as being a highly regarded investment manager, he’s a phenomenal writer. The quote above succinctly describes what markets do: They price the odds of different outcomes. Perceived certainties are rewarded with high prices, uncertainty is punished with low prices. That’s it.

Yet individual investors too often focus on payoffs without regard to the probability of that payoff, or whether the consensus estimate of that probability is just wrong.

It’s not hard at all to find examples of this here – SembCorp Marine (SGX: S51) and Keppel Telecommunications & Transportation (SGX: K11) in 2007.


Price: 11 Oct 2007

Price: 12 Dec 2013

% Change

SembCorp Marine




Keppel T&T




Source: S&P Capital IQ

In both cases, investors got most of the story right, as both companies grew revenue and earnings in subsequent years.


EPS: 11 Oct 2007

EPS: 12 Dec 2013

% Change

TTM PE: 11 Oct 2007

TTM PE: 12 Dec 2013

SembCorp Marine






Keppel T&T






Source: S&P Capital IQ

Yet anyone who invested during those times was slaughtered simply because (a) the probability of either company continuing to grow at the high rates they were priced at – through a high price earnings ratio – was low, yet (b) the consensus valued this probability as nearly certain. It was a recipe for disaster.

2. Charlie Munger: “The wise ones bet heavily when the world offers them that opportunity. They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.”

Munger, of course, is billionaire investor Warren Buffett’s famed compadre at American investment holding company and conglomerate Berkshire Hathaway.

His quote really sums up what separates good investors from the rest. More often than not, it’s not what they buy, but when they buy it.

During the recent Great Financial Crisis of 2007-2009, Buffett bet big on corporate America by investing Berkshire’s mountains of cash when everyone else got cold feet. And boy did he make a fortune.

The greats always act opportunistically, the others, like a lemming.

3. Marty Whitman: “Based on my own personal experience – both as an investor in recent years and an expert witness in years past – rarely do more than three or four variables really count. Everything else is noise.”

Whitman runs the Third Avenue Value Fund, and is one of the grandfathers of value investing. A great example of the lesson this quote provides is how different investors analyzed housing during the boom years.

Wall Street financial houses used every bit of arcane hieroglyphic wizardry to validate the idea that housing was a good investment. Former Citigroup chief executive Chuck Prince, for example, once cited the confidence in the “math and science” of finance as a reason the bank went downhill.

Referring to the ratings of collateralized debt obligations made by companies like ratings agency Moody’s, Alan Greenspan (a former US Federal Reserve chairman) himself said, “I didn’t understand it and I had access to a couple hundred Ph.Ds.”

Yet one investor, hedge fund manager John Paulson, simplified his view and figured the whole thing out. As told in the book The Greatest Trade Ever, Paulson and his team noticed that real estate prices were growing faster than household income, which was really all they needed to know to label housing as a bubble. And they were dead right – Paulson made $20 billion betting the bubble would burst.

4. Jesse Livermore: “The market does not beat them. They beat themselves, because though they have brains they cannot sit tight.”

We can argue whether Livermore was really a successful investor. He made several investing fortunes, but died of a self-inflicted gunshot wound after losing it all for the umpteenth time.

Yet Livermore really only lost money when he broke his own cardinal rules and followed the crowd, which makes the above quote all the more compelling. Many investors can tell you word for word how to spot cheap stocks, when to buy them, and when to sell them. Yet very few actually act on it, or often do so at exactly the wrong time. In some ways, Livermore was one of them. Having knowledge and utilizing knowledge are two very different things.

5. Sir John Templeton: “The four most expensive words in the English language are, ‘This time it’s different.'”

It never is. In the past century, we’ve gone from horse and buggy to iPhones. Yet markets are still prone to bubbles, booms still lead to busts, expensive stocks still return less than cheap ones, and people still do stupid things. It will always be that way.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. This article was written by Morgan Housel, and first published on It has been edited for