David Rubinstein | “How to Invest” Summary – The Qualities of Good Investors
How to Invest is a book written by David Rubinstein.
In this article, we summarize the main points of what makes a good investor in Rubinstein’s view.
Key Summary – “How to Invest” Summary – The Qualities of Good Investors
- Highly motivated, often coming from blue-collar or middle-class families.
- Good education and strong academic skills.
- Proficient in math for analysis, valuation, and risk management.
- Enjoy making final decisions and taking personal responsibility.
- Intellectually curious, eager to understand how different pieces connect.
- Hardworking, with a strong drive and willingness to put in long hours.
- Resilient, able to move on from mistakes and exit bad positions quickly.
- Willing to go against conventional wisdom when opportunities arise.
Who Is David Rubinstein?
David Rubenstein is a prominent American financier and philanthropist.
He co-founded the private equity firm The Carlyle Group in 1987, which has become one of the largest and most successful private equity firms in the world.
Rubenstein served as the co-CEO of The Carlyle Group until 2018 before becoming the firm’s co-executive chairman.
Rubenstein is also a well-known philanthropist and has donated millions of dollars to a variety of causes, including education, the arts, and historical preservation.
He is the co-founder and co-chairman of the Carlyle Group’s charitable foundation, which supports a range of organizations and causes.
In addition to his work at The Carlyle Group and his philanthropic activities, Rubenstein is a frequent speaker and commentator on economic and financial issues.
He has also hosted and produced several television shows and documentaries on history and culture, including “The David Rubenstein Show: Peer-to-Peer Conversations” on Bloomberg Television.
Come from blue-collar or middle-class families who are highly motivated to prove themselves
There is no one-size-fits-all formula for what makes the best investors.
However, according to Rubinstein, many successful investors often come from blue-collar or middle-class families who have a strong motivation to prove themselves.
First, individuals who grow up in blue-collar or middle-class families may have a greater appreciation for hard work and resourcefulness, as they may have had to work harder to achieve their goals.
This can lead to a stronger work ethic, which can be beneficial in a higher-pressure environment (which trading/investing tends to be).
Second, those from these types of families may have a greater understanding of the value of money and may be more financially disciplined.
They may have had to budget and save money to make ends meet, which teaches the importance of cost-efficiency.
Third, individuals from blue-collar or middle-class families may feel a greater sense of drive and ambition to succeed.
They may have grown up in environments where there were fewer opportunities or resources, which can lead to a stronger desire to achieve success.
Finally, these individuals may also be more risk-tolerant, as they have had to take risks in their lives to achieve their goals.
Trading/investing inherently involves risk, and those who are comfortable taking risks may be better suited for this field.
Of course, it’s important to note that there are many exceptions to this trend, and there are successful investors from all backgrounds.
Nonetheless, these factors may help explain why some successful investors come from blue-collar or middle-class families.
Good education, academically skillful
Having a good education and academic skills can be a valuable asset for investors in many ways.
Read financial documents
First, investors need to be able to read and understand financial statements, economic reports, and other complex financial documents.
A good education can provide the necessary skills to analyze and interpret this information.
Research
Second, investors often need to conduct research to make informed investment decisions.
This involves being able to read and analyze data, conduct market research, and identify trends.
A good education can provide the skills to do this effectively and efficiently.
Analytical skills
Third, a good education can provide investors with the necessary analytical skills to make sense of large amounts of data and complex financial models.
This can be particularly useful for investors who are managing large portfolios or investing in complex financial products.
Staying up-to-date
Moreover, having strong academic skills can help investors to stay up-to-date with the latest trends, developments, and best practices in the financial industry.
This can be critical to making informed investment decisions and staying ahead of the competition.
Communication
Finally, a good education can also help investors to communicate their ideas and strategies effectively, both in written and verbal form.
This is essential for building relationships with clients, colleagues, and other stakeholders in the financial industry.
Education takes many forms
Education is not limited to just memory-based learning from taking college classes.
Ultimately, trading and investing require actual experience.
Good at math
Good investors tend to be good at math for several reasons:
Analysis
Investing involves analyzing data to identify trends and patterns that can help inform investment decisions.
This requires mathematical skills, such as the ability to interpret and manipulate numbers, calculate statistics, and create models that can help predict future outcomes.
Risk Management
A core aspect of investing is managing risk, and good investors are skilled at calculating and assessing risk.
This requires a strong understanding of statistical concepts and probability theory.
Valuation
Another important aspect of investing is valuing assets or companies to determine their true worth.
This involves mathematical calculations, such as discounted cash flow analysis, which require a deep understanding of finance and accounting principles.
Optimization
Good investors are also adept at optimizing investment portfolios to achieve the best possible returns for a given level of risk.
This requires an understanding of optimization techniques, such as Markowitz’s modern portfolio theory (as a starting point), and requires mathematical skills – or working with those who do.
Like to make the final decision
Good investors tend to like to make the final decision because they are typically knowledgeable and experienced in their field, and they have a deep understanding of the investment opportunities available to them.
They understand that their decisions can have a significant impact on the outcome of their investments, and they want to ensure that they are making the best possible decision.
When making investment decisions, good investors will typically do a lot of research and analysis to gather as much information as possible about the opportunity.
They will consider factors such as market trends, the financial health of the company, the potential risks and rewards, and other relevant factors.
They will also consult with other experts in the field and consider their opinions before making a decision.
In addition, good investors understand the importance of taking personal responsibility for their investment decisions.
They know that they cannot rely solely on the opinions and advice of others, and that they must ultimately take ownership of their decisions.
This means that they tend to prefer to make the final decision themselves, rather than delegating the responsibility to someone else.
Intellectually curious, want to know about anything; how are pieces connected
Intellectual curiosity is an important trait for successful investors because it helps them to gather and analyze information from a wide range of sources, and to make connections between seemingly unrelated pieces of information.
Good investors are always seeking to expand their knowledge and deepen their understanding of the world around them, as well as the industries and markets in which they invest.
One of the key benefits of intellectual curiosity is that it enables investors to see patterns and trends that others may miss.
By exploring diverse fields and disciplines, they can gain new insights and perspectives that help them to make more informed investment decisions.
This could mean visiting different countries they’re considering investing in. Most investors get their information about other countries through their computer screens, which might be written by reporters who have never been to these countries and don’t understand the culture.
For example, traders/investors who simply look at Chinese investments as “not good” because it’s “a communist regime” are missing out on substantial nuance.
It is fine to avoid China’s markets if they aren’t a good match for one’s goals, risk tolerance, etc.
But it’s nonetheless important to have a more substantive, accurate understanding of China’s markets, economic development, regulatory regime, forward path, history that informs modern policymakers’ decisions, and so on, rather than relying on commentary from those who may not be the most insightful.
In other examples, a curious investor might study consumer behavior, emerging technologies, economic indicators, or global political trends to better understand the market conditions that could impact their investments.
Intellectual curiosity also helps investors to stay informed about new developments and trends in their areas of interest.
This means reading news articles, research reports, and industry publications, attending conferences and events, and networking with other professionals.
By keeping up-to-date with the latest news and trends, investors can identify emerging opportunities and potential risks before they become mainstream.
Finally, curious investors tend to ask lots of questions and challenge assumptions, which helps them to develop more robust investment theses.
By asking probing questions and seeking out alternative viewpoints, they can gain a more complete understanding of the factors that could impact their investments.
This can help them to make more informed decisions, and to avoid common pitfalls and biases that can lead to costly mistakes.
Exploring Interdisciplinary Insights
Curiosity often drives investors to go into areas outside their primary focus, such as psychology, technology, or sociology.
These can offer unexpected but new perspectives on market behavior.
For example, understanding behavioral economics can help understand how emotions drive market trends, while knowledge of tech advancements can help identify trends before they happen.
Immersing in Local Cultures and Economies
Curious investors often go beyond surface-level information by engaging directly with local markets.
Visiting countries or regions they are considering for investments helps gain firsthand insights into consumer behaviors, cultural nuances, and regulatory environments.
This level of immersion allows them to make better-informed decisions and avoid misjudgments based on secondhand or biased information.
Building a Diverse Knowledge Network
Connecting with professionals from various industries, academics, and policymakers can help them access a variety of insights.
Adapting to Rapid Change
Staying informed about emerging trends, such as artificial intelligence or blockchain, might help them adopt new technology before it’s popular.
For example, if you were trying to systematize trading in the 1970s or 1980s (e.g., Ed Seykota), this might have been viewed as hopeless.
Yet this is how most trading occurs today globally, especially in the most liquid, developed markets.
This adaptability is important in cases of alpha generation, where strategies can become obsolete over time.
Workaholics
While there is no one-size-fits-all definition of a good investor, it is true that many successful investors tend to be highly driven and dedicated individuals who are willing to put in long hours and hard work to achieve their goals.
This dedication and work ethic can be seen as a form of “workaholism.”
Here are a few reasons why being a workaholic can be advantageous for investors:
Investment research is a time-intensive process
In order to make informed investment decisions, investors need to gather and analyze large amounts of data from a variety of sources.
This process can be time-consuming, and often requires working long hours to keep up with the latest developments.
Markets never sleep
Financial markets are constantly moving, and there is always news, data, and other information coming out that can impact investment decisions.
Successful investors need to be on top of these developments at all times, which often means working long hours and staying connected to news sources around the clock.
Opportunities can arise at any time
The best investment opportunities can arise unexpectedly, and investors who are willing to put in the work to identify and act on these opportunities can reap significant rewards.
This means being willing to work hard and be available at all times, even outside of normal business hours.
A competitive industry
The investment industry is highly competitive, and investors who want to succeed need to be willing to put in the extra effort to stay ahead of the competition.
This often means working long hours and being willing to take on additional responsibilities to prove their worth.
Of course, being a workaholic can also have its downsides, including burnout, stress, and neglect of other important areas of life.
It’s important for investors to find a healthy balance between hard work and self-care, in order to achieve success without sacrificing their physical and mental well-being.
Make mistakes but get over them + Get out of a bad position quickly
Making mistakes is an inevitable part of trading/investing, and even the best investors will make wrong decisions from time to time.
One difference between successful and unsuccessful traders and investors is how they respond to these mistakes.
Good investors tend to be highly disciplined and self-aware, which allows them to quickly recognize when they have made a mistake and take decisive action to correct it.
This often means getting out of a bad position quickly, rather than holding onto a losing investment in the hopes that it will turn around.
Here are a few reasons why good investors tend to move on quickly from mistakes:
Risk management
Successful investors understand that investing involves taking on risk, but they also know that they need to manage that risk in order to avoid catastrophic losses.
This means being willing to cut their losses and move on from investments that are not performing as expected.
Opportunity cost
Holding onto a losing investment ties up capital that could be used elsewhere.
Good investors are always looking for new opportunities to put their capital to work, and they understand that every dollar invested in a losing position is a dollar that can’t be invested in a potentially more profitable opportunity.
Emotional detachment
Investing can be an emotional experience, and it’s easy to become attached to a particular investment or investment strategy.
Good investors, however, are able to remain emotionally detached and objective, which allows them to make rational decisions based on the available data, rather than on their own biases or feelings.
Learning from mistakes
Finally, good investors recognize that mistakes are an opportunity to learn and improve.
By quickly recognizing and correcting mistakes, they can minimize losses and avoid making the same mistakes in the future.
This helps them to continuously improve their investment strategies over time.
Willing to go against the conventional wisdom
Good investors tend to be willing to go against conventional wisdom because they understand that conventional wisdom often leads to herd behavior and crowded trades – which becomes consensus and what’s priced in – which can result in no edge.
If something is already known, then it’s not valuable because then it’s already in the price.
Conventional wisdom is the prevailing opinion or belief among a group of people, often based on common assumptions or past experiences.
It can be useful for making decisions in certain situations, but it can also lead to a herd mentality where everyone follows the same path without questioning it.
This can lead to market inefficiencies and alpha opportunities.
Good investors understand that the market is not always efficient and that there are times when the conventional wisdom is wrong.
They do their own research and analysis to identify opportunities that others may have missed or undervalued.
This often means going against the consensus view, which can be difficult and unpopular.
However, successful investors have the ability to take a contrarian approach when they see an opportunity to make money.
They have the courage and conviction to stick to their own analysis and judgment, even when it goes against the prevailing wisdom or when others are selling.
This allows them to buy assets when they are undervalued or to sell/short sell them when they are overvalued.