Proven Strategies of the World’s Greatest Investors

8/7/2019 Proven Strategies of the Worlds Greatest Investors

1/5

Proven Strategies of the Worlds

Greatest InvestorsIf you want to make a success of your investments, you would be welladvised to follow the experts. Here we look at the strategies of fivelegendary investors.

Peter LynchAge: 61

While Peter Lynch was in charge of Fidelitys Magellan fund between 1977

and 1990 it posted an average annual return of 29%. No fund manager inhistory has ever run a fund of its size (by the end of the period it was worth$14bn) so successfully for such a long time. He puts this achievement down toa few simple things, mainly the skill of finding investment opportunities inareas you are already familiar with. He made a point, for example, of lookingclosely at stocks for which he or his family had positive personal experiencesas consumers, says Peter Temple in the FT. He also looked for the simplestof businesses to invest in, famously suggesting that one should, Go for a

business that any idiot can run because, sooner or later, any idiot probablyis going to run it.

Having spotted a possible company, Lynch looks at three criteria:

profitability, price, and whether or not it has a good business model. He likescompanies with strong assets backing them and forward p/e ratios well

below forecast earnings per share. He prefers firms with strong growthpotential, but at the same time is wary of those with unsustainable growthrates. As a rule of thumb, he generally looked for earnings growth of

between 15% and 30%, says Debiprasad Nayak in The Economic TimesOnline. To Lynch, however, financial fundamentals were a secondary thing tolook at. First, he liked to understand the company thoroughly. He visitedshopping malls to see how shops were doing, check which brands wereselling and at what kind of prices. Then he looked at the balance sheet.

Lynchs book on investing, One up on Wall Street, was published in 1989.Butthat doesnt diminish its relevance today. The book introduces the idea often-baggers, the Holy Grail of investing, says Luke Johnson in The SundayTelegraph. Ten-baggers are shares that investors can make ten times theirmoney on within about five years. Finding these meant that, on the whole,Lynch avoided investing in large, well-established businesses and opted forless well-known ones or turnaround stories. He was also a contrarianinvestor like many other great investors, he sought out stocks thateveryone else was ignoring.

One final piece of Lynch advice to retail investors. You should think of yourstocks as you would your children: you have limited time, so you cant keep

an eye on too many of them at once. Lynch thinks that five stocks is enoughfor most of us to keep track of.


2/5

Eddie Lampert: the next Warren Buffett?

Eddie Lampert takes security seriously. He was kidnapped at gunpoint as heleft work in 2003 and held hostage for two days. However, his mental

resourcefulness is such that he managed to talk his way out of trouble and beback at his desk just two days later. But theres more to Lampert thanresilience alone: hes currently being touted as the new Warren Buffett.

His private investment fund, ESL Investments, which takes its name from hisinitials, has grown from $28m in 1988 to a mammoth $9bn today, returningan average 29% a year compared to the 25% a year Berkshire Hathaway hasmade since Buffett took over in 1965 (though over a much longer period).One huge success for Lampert has been his 53% stake in Kmart. Once

bankrupt, the retail giant has now merged with Sears and is a veritable cashcow, throwing off more than it can use in the business. It has $3bn in hand.

Lampert has always had powerful mentors, working with the likes of RobinRubin, former boss of Goldman Sachs, and economics Nobel winner JamesTobin at Yale. The person who first sparked his interest in investing, though,was his grandmother, who would read the ten-year-old Eddie Lampert stockquotes from the paper. He has also paid close attention to Warren Buffett,dissecting his reasons for making each investment. Lampert tends to go formature, easy-to-understand businesses with strong cash flows, long-termreturns being much more important than short-term bumps and rises (soundfamiliar?). He is also starting to turn minority stakes into larger plays wherehe has the majority and can control a firm as he did with Kmart. There isnothing Lampert likes to control more than how money is spent, says

BusinessWeek. Every dollar must earn as much as possible, and hiscompanies will often use cash to buy back shares rather than boost capitalspending.

But for all these similarities, Lampert is no Buffett clone. He is moreassertive with management, for one thing, and is more willing to targetpoorly run companies as they produce greater returns when turned around.Unsurprisingly, he can be tough at ESL too, where, with just 15 employees,he runs a tight ship. Former workers talk about his understanding of risk,and his uncanny ability to see how the pieces of an investment fit together.

Warren BuffetFortune: $40bn

If, at its inception in 1954, an investor had placed $10,000 in Sir JohnTempletons flagship Templeton Growth fund, it would now be worth nearly$7m, which is nice, and qualifies him as an investing guru (the same money inan S&P tracker would have returned you $500,000). But if, 11 years later, youhad put the same $10,000 into Berkshire Hathaway just after Warren Buffetttook it over you would now be sitting on a nest egg of over $50m.

Buffett is a patient investor and a cautious one. He ignored the tech-bubbleentirely, and still doesnt hold a single tech or internet stock, not evenMicrosoft. He would, he says, bet it will do well, but as he points out, why


3/5

should he have to bet? He likes stocks he can see, and thereforeunderstand, such as Coca-Cola: he believes its much easier to predict therelative strength that Coke will have in the soft-drink world than Microsoftwill in the software world.

Unlike Templeton, he seems to think that he can still find value in theAmerican market earlier this year, for example, he bought PacifiCorp fromScottish Power, in what is seen as his new investment technique to buyentire companies, rather than simply taking a stake, says SmartMoney. InApril, he also bought a significant stake in Anheuser-Busch, the worldslargest brewer and the maker of Budweiser beer. Buffetts reputation goes

before him as soon as his purchase was announced, the share price went up6%.

As well as being able to see his stocks, Buffett likes to know them intimately.He once likened over-diversifying a portfolio to having a harem of 40 women you never get to know any of them very well. His stocks are more like

friends: he knows them well and holds onto them for the long term, or aslong as they pass his growth tests without becoming over-priced. The key,he says, is to think of yourself as part-owner of the business, says GrahamSearjeant in The Times.

He is very sceptical about the future of the dollar last year, he bet $21bnagainst the dollar. With his other currency plays, this earned him $2.6bn lastyear but with the dollars recent rally, he has been hit, and could have lostas much as $1bn, says SmartMoney. But the worlds second-richest manand best-known investment guru is undeterred and continues to positionBerkshire Hathaway, his investment company, for dollar weakness, say

Patrick Hosking and Gabriel Rozenberg in The Times. Still, he cant find muchto invest in at all, be it a dollar asset or not. At Berkshire Hathaways AGM inMay, he said, Wed love to have one [an acquisition] in the $5bn to$10bnrange. At the moment, weve got more money than brains, and we hope todo something about that.

Benjamin Graham1894-1976

From 1936 to 1956, Benjamin Graham had a remarkable record as a stockpicker, say Pablo Galarza and Stephen Gandel in Money. Over the 20-year

period, his mutual fund had a compounded average return of at least 14.7%,compared to 12% for the overall market. That may not sound like much of adifference, but, as Galarza and Gandel point out, a $10,000 investment inGrahams fund would have earned roughly $60,000 more than the average inthe space of two decades.

So how did he know which stocks to pick? He was the ultimate valueinvestor. His net current asset value (NCAV) approach is relativelyunknown to individual investors, says Harry Domashs Winning Investing,

but it was clearly successful for him. It is a system that calls for buying stockstrading below their calculated value. Instead of using the more usual bookvalue (assets minus liabilities), Graham wanted to know what the company

would be worth if it were liquidated tomorrow. In order to work this out, hewould only include current assets (ie, cash, inventories and accounts


4/5

receivable), while ignoring long-term assets, such as buildings and patents.He would delete from this both long and short-term liabilities, giving him theNCAV. His aim was to find and buy companies trading at two-thirds or lessof their net current asset value.

He insisted on such a heavy discount because he believed that you needed amargin of safety a price so low that you can make money even if somepart of your analysis turns out to be wrong, say Galarza and Gandel. Thisgave him leeway to carry out less research than many of his colleagues, as alot of it would be redundant if the shares were cheap enough. For example, ifa company has current assets worth $12 per share and no debt, you wouldhave a nice margin of safety if you bought its shares at $7, however dodgy its

business.

A true Graham follower has to be resigned to buying companies that therest of the market think are lousy, say Galarza and Gandel. Like Templetonand Lynch, he focused on companies the rest of the market were ignoring, so

that he could pick them up cheaply while knowing that the real value wasthere to back up the investment, even if the company went bust. Grahamdiscovered the hard way that this was a good investment strategy. One of hisearly picks was Savold Tire, which he bought on its first day of trading making an impressive 250% in a short period of time. But instead of reapinghis profit, he held onto the stock. Six months later, corporate fraud wasexposed at the firm and its shares became totally worthless. His response washis NCAV strategy, designed to ensure that even if companies went intoreceivership, there would still be money left for investors.

Sir John Templeton

Age: 92Fortune: estimated at over $1bn

He may be 92 years old and have sold his family of mutual funds (for $913m,in 1992), but that doesnt mean Sir John Templeton doesnt still know a thingor two about investing. Described as arguably the greatest global stockpicker of the century in Money magazine, he continues to keep an active eyeon whats happening in the markets. Right now, thats not something he findsvery comforting: in recent years he has been very worried about the qualityof investments in the market and he has repeatedly warned that the UShousing boom is more of a bubble, and that it will soon burst.

Nowadays, Templeton works full-time as a philanthropist; donating about$40m a year to discovering how religion can influence the physical world,says Lyford Cay in Financial Intelligence Report. However, he remainsdedicated to his first vocation: the study of investments, says Cay. Andthanks to his close study of the markets, his timing has been impeccable.Templeton took short positions in dotcom and tech stocks at the very heightof the 1990s boom and managed to make himself another fortune in theprocess.

So how does he choose which stocks are going to make him money?Templetons first rule is to do the opposite of the crowd. He moved to theBahamas 32 years ago, and found that not being in the middle of the market


5/5

buzz meant that he didnt accidentally follow everyone elses investmentideas.

Unpopular stocks arent necessarily bad stocks, says Templeton; they mayjust be unfashionable, and therefore cheap (unlike the dotcoms in 1999).

Finding this kind of value is his main criteria. By looking at companiesmarket capitalisation (share price times number of shares in issue) and thencalculating the intrinsic value (what he believes the companys assets and themarket are really worth), he spots ones that are trading too cheaply. AsTempletons foundation website points out, standard stock-buying advice isbuy low, sell high. But he followed the advice to the extreme pickingcompanies, industries and even nations that were at rock bottom levels, orpoints of maximum pessimism, as he puts it.

Templetons next step was to assess the risk. Stocks might be at bargainprices, but the risk that somebody might do something stupid may be toohigh, he told Cay. Over the years, his combined interest in value and risk has

lead him to invest all over the world if he were to make one criticism ofWarren Buffett, it would be that he is small-sighted. If he had spent moretime in foreign nations, he would be better off, he told Cay. Templeton, onthe other hand, loves to invest abroad. At present, for its combination ofgood value and low risk, Templetons favourite country is South Korea buthe is also looking around in China, Russia and Canada.

His advice to smaller investors is to take the same approach. Invest in a well-managed mutual fund focusing on nations and industries where share pricesare not so high, he told SmartMoney. One place that doesnt currently fit the

bill? The US. Indeed, Templeton told Cay that he doesnt remember a time

when you had to search so diligently to find anything that was a bargain inAmerica.

****************************************************************************************Information in Proven Strategies of the Worlds Greatest Investors is forgeneral information only and is not intended to be relied upon by individualreaders in making (or not making) specific investment decisions. Appropriateindependent advice should be obtained before making any such decision.

To contact Fleet Street Publications Ltd, please send an Email to our customer

services department at: [email protected]. Fleet Street Publications LtdRegistered office: Sea Containers House, 7th Floor, 20 Upper Ground,LondonSE1 9JD. Tel: 020 7633 3600

Documents

Proven Strategies of the World’s Greatest Investors