How to Invest

1. Investing is a Measured Prediction of the Future

In the investment world, achieving a profit—to a lesser or greater degree depending on the type of investment—is the essence of investing.

Predictive action. At its core, investing is the act of predicting the future and taking actions based on that foresight. Unlike many life events where success is subjective, investment outcomes are precisely measurable by profit or loss. This inherent measurability forces investors to constantly refine their predictive models and decision-making processes.

Future performance. An investor's prediction hinges on the likely future performance of an asset, considering factors such as:

• Company growth (new customers, innovative products)
• Economic conditions (strength, interest rates)
• Competitive landscape
• Regulatory changes and climate impact
  These elements collectively determine an asset's desirability and potential for profit.

Risk assessment. Crucially, investing involves assessing the risks that could upset an investor's belief in a positive outcome. While life presents unquantifiable risks, the investment world demands precise measurement of consequences. This rigorous evaluation of potential downsides is fundamental to making informed and profitable investment decisions.

2. Great Investors Share Core Traits and Principles

Great investors have a number of skills and attributes in common, as I will discuss.

Shared attributes. While diverse in their specialties, leading investors exhibit common traits that contribute to their success. These include a high degree of intelligence, often reflected in academic achievement, and a relentless work ethic driven by a passion for the "game" of investing. They view work as pleasure, enabling sustained effort.

Key characteristics:

• Intelligence & Academic Prowess: Many excelled academically, demonstrating an ease with numbers and analytical thinking.
• Hard Work & Passion: They are often workaholics, driven by an obsession with their craft rather than just money.
• Focus & Attention to Detail: The ability to concentrate on critical factors and absorb vast amounts of information is paramount.
• Intellectual Curiosity & Reading: They are voracious readers, constantly seeking knowledge that might remotely relate to their investments.
• Ultimate Responsibility: They prefer to own final investment decisions and are content to bear the consequences.

Continuous evolution. These traits are not static; great investors continuously evolve, learning from both successes and failures. Their journey is marked by a commitment to self-improvement and a deep understanding that mastery is an ongoing process, not a destination.

3. Embrace Contrarian Thinking and Independent Judgment

But great investors do not accept conventional wisdom; they see what others do not; and they are prepared to take the risk of being proven wrong by going against conventional wisdom.

Defying the crowd. A hallmark of exceptional investors is their willingness to challenge and reject conventional wisdom. They possess the courage to pursue opportunities that others overlook or deem too risky, understanding that true value often lies where the consensus is wrong. This independent thinking is crucial for identifying mispriced assets.

Seeing inefficiencies. As John Rogers Jr. learned from Burton Malkiel, markets can be swept up in "the madness of crowds," creating inefficiencies. Great investors like Seth Klarman actively seek these mispricings, buying when others are fearful and selling when others are greedy. This contrarian stance allows them to capitalize on market dislocations.

Calculated risk. Going against the grain is not reckless; it's a calculated risk based on deep research and conviction. Marc Andreessen noted that some of the best deals in history were initially passed on by many. This ability to trust one's own analysis, even when it diverges from popular opinion, is a powerful differentiator in achieving outsized returns.

4. Risk Management and Downside Protection are Paramount

Knowing what you’re putting at risk is ultimately the most important thing you can do.

Focus on downside. Successful investors prioritize understanding and mitigating potential losses before chasing gains. As Sam Zell emphasized, being "wrong in a controlled fashion" is key, aiming for a high batting average while ensuring that losses are limited and acceptable. This focus on downside protection is a core tenet.

Margin of safety. Seth Klarman's concept of a "margin of safety" is central to this approach, meaning buying assets for significantly less than their intrinsic worth. This buffer provides protection against unforeseen events or bad luck, ensuring that even if things go wrong, the investor has a chance to recover capital or still make a profit.

Learning from pain. Ray Dalio's principle, "pain plus reflection equals progress," highlights the transformative power of mistakes. His own experience of losing everything in 1982 taught him the critical importance of diversification and stress-testing his thinking. This resilience and ability to learn from setbacks are vital for long-term survival and success in investing.

5. Diversification and Realistic Expectations are Essential

Diversify your investments. This principle is one of the key tenets of investing: do not put all your eggs in one basket.

Spreading risk. Diversification is a fundamental rule, ensuring that no single investment can catastrophically impact a portfolio. This involves investing across different asset classes, sectors, and geographies, and ensuring these investments are not completely correlated, meaning they won't all move in the same direction simultaneously. Mary Erdoes stresses that diversification is the trick to keeping and growing money.

Realistic returns. Setting achievable return expectations is equally crucial. Unrealistic goals often lead to overly risky investments and eventual disappointment. For nonprofessional investors, continuously achieving annual returns above mid-to-high single digits is extremely difficult. As Mary Erdoes notes, while a balanced portfolio might average 6.5% annually, many individuals achieve less than 3% due to emotional decisions.

Avoiding pitfalls. Both diversification and realistic expectations guard against common investor mistakes:

• Overconcentration: Putting too much capital into one speculative asset.
• Chasing hype: Investing in "get-rich-quick" schemes or fads without deep understanding.
• Emotional trading: Buying high and selling low due to fear or greed.
  These principles help maintain a disciplined, long-term approach to wealth building.

6. Patience and Long-Term Vision Drive Superior Returns

If you own something good, hold it for a long period of time.

Enduring commitment. Great investors demonstrate remarkable patience, holding onto quality investments for extended periods, often decades. Ron Baron, for instance, holds stocks for the long term, avoiding frequent trading to minimize taxes and capitalize on compounding growth. This steadfastness allows investments to mature and realize their full potential.

Beyond short-term noise. A long-term perspective enables investors to look past daily market fluctuations and economic headlines. John Rogers Jr. emphasizes the ability to "look out over the horizon to try to imagine the future three years from now, five years from now," understanding that temporary downturns can present significant buying opportunities for patient capital.

Compounding wealth. The true power of long-term investing lies in compounding. As Mary Erdoes explains, a consistent 6.5% annual return over 20 years yields a very sizable sum. This patient approach, combined with a focus on fundamentally strong businesses, allows wealth to grow exponentially over time, far outweighing the allure of short-term gains.

7. The Power of Specialization and Deep Domain Knowledge

The most important thing is to concentrate on a particular area that you know better than other people.

Niche expertise. Many highly successful investors achieve their edge by specializing in a particular industry or asset class, developing profound domain knowledge that others lack. Orlando Bravo's firm, Thoma Bravo, became a global leader by focusing exclusively on enterprise software, understanding its unique economics and value drivers.

Competitive advantage. This deep specialization allows investors to:

• Identify overlooked opportunities.
• Conduct more effective due diligence.
• Add specific, actionable value to portfolio companies.
• Negotiate more effectively due to superior understanding.
  John Paulson's success in shorting subprime mortgages stemmed from his specialized knowledge of credit securities and their unique structures.

Beyond generalists. While broad market knowledge is valuable, true outperformance often comes from a narrow, deep focus. As John Rogers Jr. advises, individual investors should "stay within your circle of competence," investing in industries they know extremely well. This specialized insight enables investors to "see things that others don't see."

8. Adaptability and Continuous Learning are Crucial

The moment you stop growing and learning, someone’s passing you by.

Evolving landscape. The investment world is in constant flux, driven by technological advancements, economic shifts, and geopolitical events. Larry Fink stresses that successful investors must be "a student your entire life," continuously re-educating themselves to stay relevant and current. This commitment to lifelong learning is non-negotiable.

Learning from mistakes. Adaptability also means recognizing and correcting errors swiftly. Paula Volent emphasizes that once a mistake is identified or conviction is lost, "you need to act." Jim Simons's journey from mathematics to quantitative trading illustrates a profound ability to pivot and apply new methodologies when old ones cease to be effective.

Embracing change. The ability to embrace and capitalize on change is a hallmark of cutting-edge investors. Marc Andreessen's firm, Andreessen Horowitz, thrives by identifying and investing in "breakthrough technological transformations" like blockchain and biotech. This forward-looking mindset, coupled with a willingness to challenge existing assumptions, is vital for navigating dynamic markets.

9. Teamwork, Culture, and Mentorship are Foundational

The way I’ve really succeeded is by surrounding myself with great people.

Collective intelligence. Investing, especially at scale, is a team sport. Jim Simons attributes his success to "surrounding myself with great people," fostering an environment where diverse perspectives and intellectual firepower drive decision-making. This collaborative approach leverages collective strengths and mitigates individual biases.

Strong culture. A robust organizational culture is critical for long-term success. Larry Fink dedicates significant time to BlackRock's culture, emphasizing a single technology platform and a shared belief in global capital markets. This cohesive environment fosters trust, efficiency, and a unified vision among employees.

Mentorship and development. Mentorship plays a vital role in nurturing talent and ensuring continuity. Paula Volent's career was profoundly shaped by David Swensen's mentorship, who instilled in her a love for mission-driven investing and rigorous critical thinking. Sandra Horbach highlights the satisfaction of "helping lead young investors" and fostering diversity within the industry, recognizing it as an "apprentice business."

10. ESG and Social Impact are Increasingly Integral to Investing

Today, in many places in the world, if you do not consider ESG, you are not fulfilling your fiduciary duty.

Beyond profit. The investment landscape is increasingly integrating Environmental, Social, and Governance (ESG) factors, moving beyond a sole focus on financial returns. David Blood, co-founder of Generation Investment Management, asserts that considering ESG is now a fiduciary duty, reflecting a growing recognition of sustainability's economic relevance.

Value creation. The conventional wisdom that ESG detracts from returns is being overturned. Investors increasingly believe that companies with strong ESG metrics will outperform, driven by:

• Customer preference: Consumers are more attuned to ethical and sustainable practices.
• Talent attraction: Desirable employees seek purpose-driven organizations.
• Investor interest: More capital flows towards responsible investments.
  This shift positions ESG as a tool for differentiated insights and enhanced risk-adjusted returns across all asset classes.

Mission alignment. For institutions like university endowments and foundations, aligning investments with their mission is paramount. Kim Lew emphasizes that an endowment's investment arm must be "aligned with the values of that institution," particularly regarding issues like climate change and diversity. This ensures that financial goals support broader societal objectives.

11. New Asset Classes Offer Unique Opportunities (and Risks)

We have this convergence between the metaverse of stuff that’s built in the digital world and the real world, which is happening at lightning speed as blockchains become more and more important.

Frontier exploration. The investment world constantly generates "cutting-edge" categories, from cryptocurrencies to SPACs and private infrastructure. These areas attract capital seeking outsized profits by being on the ground floor of technological or structural revolutions. Mike Novogratz, an early crypto investor, sees a "generational movement" driven by youth seeking alternatives to traditional finance.

Diverse motivations. These new asset classes appeal for various reasons:

• Cryptocurrencies: Offer decentralization, scarcity (like Bitcoin), and utility in new digital economies (like Ethereum and NFTs), appealing to those wary of government-backed currencies or seeking technological innovation.
• SPACs: Provide a faster, less expensive path for private companies to go public, offering access to capital and public market exposure. Betsy Cohen highlights their role in addressing capital needs for rapidly growing companies.
• Infrastructure: Attracts investors with long-duration assets, predictable cash flows, and inflation protection, as governments increasingly privatize or seek private capital for essential services. Adebayo Ogunlesi's firm, GIP, demonstrates how operational efficiency can drive significant returns in this sector.

Calculated risks. While offering immense potential, these cutting-edge investments come with unique risks, including high volatility (crypto), market saturation (SPACs), and complex regulatory or political hurdles (infrastructure). Successful investors in these areas combine deep expertise with a willingness to take calculated risks, understanding that the future is often forged in uncharted territory.

Last updated: August 29, 2025