Can you learn from Tim Ferriss’ investment philosophy?

by Shane Leonard, CFA @shaneleonard121

Tim Ferriss has a remarkable way of getting famous people to talk. Interviews range from Kevin Costner, the actor, to Peter Thiel, the venture capitalist. Some are pure comedy, like Seth Rogan. Others are uplifting, like philosopher Alain de Botton.

The common thread, is a search for knowledge and self-improvement. Both in life and finance, Tim’s had a lot of success. Fortunately, for his listeners, he’s busy sharing his wisdom.

Tim’s Five Investing Tips

In a recent podcast, Tim outlined the basics behind his investment philosophy. Listen. Go on.

And if not, read on. Because this isn’t the only podcast where Tim has shared his thoughts on investing and building a business.

To start with, it’s key to remember that Tim isn’t a financial advisor. He’s self-taught. So his wisdom is hard earned. It’s practical. It’s personal.

I am going to go through the steps that I took and how you can apply them, hopefully for some increase in competence, confidence or just the pure realisation, that you shouldn’t play in games that you aren’t prepared to research and win.

He doesn’t mince his words. What he suggests are simple ways to improve how you invest. Though they require time as successful investing isn’t for the lazy.

#1: How do you invest and win?

You have to have an advantage. Tim outlines 3 potential sources:

  1. Informational: you have information other people do not. For example, Tim’s an active member of the start-up scene in Silicon Valley. So he’s got insight that others do not.
  2. Analytical: are you better at interpreting the data? Are you able to make better use of the data than others?
  3. Behavioural: which is rarely discussed, is the ability to divorce emotions from financial decisions. Resisting the noise and hype of Mr. Market.

Without one of these advantages, you are unlikely to out-perform and even likely to harm your savings.

#2: Invest don’t Speculate

Before you even start thinking about which advantage you possess, or which you’d like to develop, it’s a good idea to think what your investing is for.

Defining the term investing can be a little tricky. For me, I subjectively define it as allocating resources to improve my quality of life.

For example, even if you have an investment that could multiply in value, if it keeps you up at night, worrying, it may you shouldn’t own it. Why sacrifice your quality life today for a speculative future cash payout? A payout that is anything but guaranteed.

#3: Read a Lot

There are lots of different styles of investing, start-up investing, value, growth, quality, event-investing. But often, these investing styles conflict with each other.

You need to read about all of them. The goal is to identify which investment style matches your strengths, and which investment style would feed upon your weaknesses.

Tim identifies six book groups to help.

Start by reading about Warren Buffett. The Making of an American Capitalist and The Snowball: Warren Buffett and the Business of Life.

Then, read Buffett himself. He writes an annual letter to the shareholders of Berkshire Hathaway. They are full of his wisdom on what makes a great investment.

In contrast to Buffett is a book called More Money Than God. An insight into the world of hedge-funds, the elite of the finance world. The value of this book is to see the diversity of the characters that make it to the top and the different ways they have succeeded.

The third group on the list includes Liar’s Poker and Flash Boys, both by Michael Lewis. They make it clear that if you believe a casual read of Barron’s and the Wall Street Journal is going to help you win against the professionals, then you are wrong. The professionals are sharks or brainiacs with near-infinite resources. Lewis’ books are a good reality check, for anyone who wants to outsmart the professionals.

Fourth comes a really underrated book You Can Be A Stock Market Genius by Joel Greenblatt. Where Greenblatt talks about event-based investing. Where you are looking for an event, for example a potential merger or an unloved stock after a disaster, any trigger that will help boost the stock price.

Though it’s possibly a book for intermediate and advanced investors. (Ed, Blue Horseshoe loves Anacott Steel, eh?)

Next is Money: Master the Game. 7 Simple Steps to Financial Freedom, a great compilation of interviews with famous financial professionals. In it, Tony Robbins deconstructs the best practises of some of the brightest minds in finance. There are gems in this book for novices and professionals alike. So much so, that Tim spent over two hours interviewing Tony Robbins on a recent podcast.

Lastly, there are books on index investing, i.e. not trying to beat the professionals. These books give a compelling logic to paying low fees and buying index funds.

Too often, the immediate reaction to reading Liars Poker or More Money Than God, is to throw yourself into Wall Street like aggressive trading. These books will temper that urge.

Examples include Daniel Solin’s The Smartest Investment Book You’ll Ever Read, any book by the founder of Vanguard, Jack Bogle, or A Random Walk Down Wall Street by one of Bogle’s colleagues, Burton Malkiel.

And if you don’t have time to read these books, you shouldn’t do the investing yourself. If you aren’t able to work out what type of investor you are or what your advantage is (Informational, Analytical, Behavioural), then get a professional to do it. Or better still, put it in low cost index-funds.

#4: Understand Failure

It’s important to offset all the success stories you’ll find with the hard facts of what it’s like to lose money.

In the book, What I Learned Losing A Million Dollars, Jim Paul gets into the psychological, the practical, the cognitive biases and the fallacies when you start attributing failure to bad luck and success to skill.

It underscores how difficult it is for people to manage their emotions as they start to lose money. For example, think about people who rely on financial advisors. A conversation with a financial advisor typically starts with a question about how much money you are willing to risk, to gain long-term.

Most people say they can tolerate a loss of 15%. But when their portfolio starts dropping, people start freaking out when the are down 5 to 10%.

So, it pays to take a very conservative approach to assessing your risk tolerance. Chances are you are going to freak out a lot sooner than you expect you will.

#5: Pick an Area, Pick a Timeline, Pick Some Tentative Rules

Having read about many different people, investing in many different ways, it’s time to think about your own persona and how much money you have to invest. Have you identified the type of investor you are?

With that knowledge you need to pick an area to invest in. Is it real-estate? Is it the stock market? Is it start-ups?

Next, what is your timeline? Your investment decision is likely to be very different for a 3 month, 3 year or 30 year horizon.

Finally pick a set of rules, your criteria for investments. What are the triggers for buying, and equally important, what are the triggers for selling. A fundamental error that we all make is thinking the buying decision is the hardest part of investing. Remember:

The reality is, you haven’t made your return on an investment, until you sell it.

So knowing when to sell and having a plan to sell, is just as important as buying in the first place. Like a good poker player, you need to know when you are going to walk with your chips.

#6: Start with Paper Trading

(Ed, I thought there were only 5 things:)

Don’t go out and spend a ton of money, and think you are done. Start with a hypothetical portfolio, paper trading, a dummy portfolio.

For example, if your timeline is 2 years, place a bunch of hypothetical bets on stocks. Keep a track record of when you think you would have sold some or bought more. Then after 2 years you can assess how you would have done. Sure, you’ll have spent 2 years learning, but your investing horizon is probably 30 years.

If start-up investing is the area you’ve picked, then you’ll need to read Venture Deals by Brad Feld. Startups are more complex that stocks, so you need to understand the process and terms.

Once that’s done, go to AngelList to create your hypothetical portfolio. Look at the companies raising money via syndicates. Pick a few and track them.

However, unlike stocks, you can’t sell. So instead, it’s a matter of how many of the start-ups die / shut down, versus grow / get acquired.

Tim suggests back testing, your ability to pick start-ups using the finalists from the TechCrunch Disrupt competitions in 2010 and 2011. Watching the pitch videos. Placing your hypothetical bets. Then checking the leaderboard to see if the businesses survived, raised money or got acquired. Unfortunately, when you go to the list of start-ups for 2010 and 2011, it’ll tell you if they Closed or got Acquired. So it’s tough to avoid the bias of telling yourself you’d have picked the “winners”.

#6 (The Alternative): A Real World MBA

In contrast to paper trading, Tim designed a real world MBA for himself. Back in 2007, he decided to invest $120,000 in start-ups, instead of spending the money on an MBA at Stanford University. He felt that the connections and experience he would gain, even if he lost all the money would compensate for the cost. He regarded it as tuition fees, building an alumni network and earning a skill-set as if he’d been in the MBA classroom. He’s had some hits and some disasters, but one of the key lessons from his real world MBA is that the time horizon on start-up investing is very long. On average he’s seen his money committed for 7 to 10 years.

Though obviously, Tim is keen to point out that you can only do a real world MBA if you have the financial cushion to lose all that money.

#7: Regular Check-ins

Don’t lose sight of your goal. Don’t just focus on the metrics, the return on your investments, the amount of money in your bank account and the valuations on paper.

Many of these things could be making you utterly f***ing miserable.

Two books to keep your investing grounded in reality are The 80/20 Principle and Less Is More with maxims and ideas on how to focus, the importance of keeping life simple, how to improve your lifestyle, the way you work, and yes, hopefully improve how you invest.

And of course, Tim finishes by suggesting you revisit the book that made him famous, The Four Hour Working Week.

So what are the lessons?

100% of Tim’s advice is worthwhile.

Though unless you live in Silicon Valley, are on the inside-track and have a spare $120,000, Tim’s advice on start-up investing is unlikely to be of use.

So let’s focus on what is relevant to most of us:

  1. Don’t expect to succeed at investing if you aren’t willing to do the research. Research and self-education need to be wide and life-long. Reading, listening, thinking, discussing ideas.
  2. Play to your strengths. Are you great at analysis? Are you great at controlling your emotions? Do you have a longer time horizon that others?
  3. Be realistic. Don’t attribute your gains to being smart and your losses to bad luck. There is no data on the future, so luck will play a huge part in any gains you make. In contrast, even your best research can get you into a bad investment. You’re human, remember!
  4. Ignore paper profits and losses. As bubbles show, paper-profits can vanish. And paper losses only become permanent if you sell. If a stock is down, is it a temporary setback or has something fundamental gone wrong?
  5. Focus on the goal. Investing is about putting money aside for future use. It’s not a goal in itself. You are investing for a reason.

And in Tim’s case, he makes sure he doesn’t do anything with his money, that he’s not comfortable with, that’s speculative or makes him feel miserable.

What next?

Here are 3 simple steps:

  1. Get reading
  2. Work out your style
  3. Start saving

#1: Reading

If you don’t have a Kindle, maybe it’s time you get one! Then you can download and plough thorough Tim’s recommendations.

And if you aren’t convinced by his book list, here’s our favourite 30 investment books. Some are practical, some historical, and some are just pure entertainment.

#2: Investment Style

Once you’ve immersed yourself in the history of money and practicalities of investing, you’ll have a good idea what your style of investing is likely to be. Broadly speaking there are 2 schools of investing: Active or Passive.

If you choose the passive route, you are either hiring someone else to make the active decisions for you or you decide to just focus on mirroring the market, making no attempt to do better than the average. An admission of defeat? No. Index-investing is a powerful and valuable tool that most of us should use. It’s simple, cheap and effective.

If you choose the active route, you are going to manage your investments yourself. Although people will try and over-complicate the different schools of active investing there are really only 3 strategies:

  • Growth investing, where you want to back the most innovative companies on the planet, and know you might have to pay-up to play.
  • Value investing, where you try to buy dollar bills for 80 cents, knowing that the stock is probably unloved for a reason.
  • Quality investing, where you want to back great teams running good companies, but recognise that they may not be the fastest growers or cheapest investments available.

Here’s a simple tutorial we’ve recorded to help you work out your own investing psychology.

#3: Saving

Smart as it is to practise investing with a dummy portfolio, improving how you invest is only part of the solution.

Starting to save, even $10 a week, as soon as possible, is critical. Life isn’t short. On average, it’s 80 years long. The sooner you save the sooner you start compounding. As Albert Einstein said:

Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.

So, even if you still don’t know how to invest, don’t worry. Start saving for when you do know.


Author notes:

Shane Leonard, CFA, is the CEO and co-founder of Stockflare, a financial data company. Previously he worked as a stockbroker at Citigroup and Credit Suisse. The views in this article reflect his personal views!