Are you determined to become a better investor this year? Mastering the stock market can seem daunting, but one short cut is to learn from the masters.
Many had a good way with words too, cutting through the jargon so common among today’s professionals to bring home the essentials of the subject in a way that anyone could understand.
Here we look at five of history’s greatest investors – and how their wisdom might help you get more from your money today.
John Maynard Keynes
You probably think of John Maynard Keynes as one of the 20th century’s most influential economists. But he was also a brilliant investor. His Cambridge college, King’s, appointed him bursar in 1924. Between then and his death in 1946, the fund he managed for King’s grew from £30,000 to £380,000, a remarkable feat given the stock market turbulence of those decades.
The path was far from smooth, however, with the fund tumbling in the 1929 Wall Street Crash.
But this painful experience provided valuable knowledge, shaping a new investing style for Keynes. He went from trying to work out what the market would do to focusing on a small number of individual companies – a style adopted by Benjamin Graham and Warren Buffett (see below).
In a 1934 letter, Keynes said: “As time goes on, I get more convinced that the right method in investment is to put fairly large sums into enterprises which one knows something about and in the management of which one thoroughly believes.”
So what did he buy?
In the Thirties, he dramatically increased his holdings of mining shares and stocks that had fallen but seemed well placed to recover. Union Corporation, the South African miner, was a core holding, as were Austin Motors and Hector Whaling. He also challenged convention merely in his devotion to shares. At the time, most institutions were wedded to bonds.
Best quote: “The dealers on Wall Street could make huge fortunes if only they had no inside information.”
Investment returns: 12 per cent a year.
Few investors are household names but Warren Buffett, otherwise known as “the Sage of Omaha”, is the exception. Buffett runs Berkshire Hathaway, an American firm that owns insurance companies among other investments.
His approach to investing in shares could be summarised as “buy and hold” – but he chooses them carefully in the first place. Berkshire’s biggest holdings, which include American Express and Coca-Cola, are long-established businesses with loyal customers.
Buffett looks for companies that not only generate profits consistently but are able to reinvest them in the business. Not all companies do this; even if they make profits, they may squander them by using the money to expand into less lucrative areas.
Buffett is not bothered by falls in the stock market – in fact he actively welcomes them if he can buy more of the same shares more cheaply.
He says: “Overall, Berkshire and its long-term shareholders benefit from a sinking stock market, much as a regular purchaser of food benefits from declining food prices. So when the market plummets – as it will from time to time – neither panic nor mourn. It’s good news for Berkshire.”
Best quote: “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”
Investment returns: 19.7 per cent a year (Berkshire Hathaway shares, 1965-2012).
Sir John Templeton
John Templeton, who was born in Tennessee but later became a British citizen, started his Wall Street career in 1937. When war broke out, he used borrowed money to buy 100 shares each in 104 companies whose share price was $1 or less. Only four turned out to be worthless, and he made large profits on the others, holding them for an average of four years.
This story encapsulates his approach. First, he believed in buying at a time of extreme pessimism, when most people would instinctively avoid the stock market. He also sought out undervalued companies, but sold the shares when their prices had recovered, exemplifying his principle that investors should “expect and react to change – there are no stocks that you can buy and forget”.
Templeton took a global approach to shares, saying: “If you search worldwide, you will find more — and possibly better – bargains than in any single nation.”
He was the first Western investor to appreciate the potential of Japan’s post-war economic miracle, but also moved his clients’ money out before the Tokyo market peaked in the late Eighties – moving it to America in time to catch a bull market there.
Templeton’s fund management business still exists as part of Franklin Templeton, and his principles are used “on a day-to-day basis” in the running of the Templeton Growth fund, says its lead manager, Dylan Ball.
Best quote: “The only way to avoid mistakes is not to invest — which is the biggest mistake of all.”
Investment returns: 15.1 per cent a year (US version of the Templeton Growth fund, 1954-1986)
Benjamin Graham, who started his Wall Street career in 1914, is regarded as the first investor to take a scientific approach to picking shares.
After losing money in the great crash of 1929, he decided to look for shares whose prices offered a “margin of safety” – where the value of the company’s assets exceeded the value placed on it by the stock market. He described his approach in two highly regarded books, Security Analysis and The Intelligent Investor.
Graham taught at Columbia University in New York, where Warren Buffett was among his pupils. Buffett called him “the greatest teacher in the history of finance”.
Like Buffett and Templeton, Graham believed in going against the crowd. “Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic,” he said.
Best quote: “In the short run the market is a voting machine, but in the long run it is a weighing machine.”
Investment returns: reportedly 20 per cent a year over his career (detailed figures not available).
You might imagine that successful investors spend their time poring over company accounts, but Peter Lynch, who ran the giant Fidelity Magellan fund in America for many years, said he got many of his best investment ideas outside the office.
He believed that ordinary investors could steal a march on the professionals by using their eyes and ears in everyday life. “I stumble on to the big winners in extracurricular situations,” he says. “Apple computer – my kids had one at home, and then the systems manager bought several for the office. Dunkin’ Donuts – I loved the coffee.”
Lynch didn’t just go straight out and buy the shares, but used these insights as a basis for further research.
While he didn’t advise investors to put all their money into shares, Lynch said in 2002: “I believe in stocks. If you look at the returns of the last 70 years, stocks are the undisputed champs.”
He remains an adviser at Fidelity in America, and the Magellan fund is still run in line with his strategy, a company spokesman said.
Ken Fisher, the founder and head of Fisher Investments, described Lynch as “the first of the great post-1960s stock-pickers”.
Best quote: “Invest in what you know.”
Investment returns: 29 per cent a year (Fidelity Magellan fund, 1977-1990)
Source : Telegraph