Great investors are tested by times, economic cycles and financial crisis. We can all learn from the investment advice of these great investors.
Warren Buffet – The Value Investor
Warren Buffet’s unmatched investment record in the 20th century” has earned him the name The Oracle of Omaha. The oracle has no crystal ball, though. Far from fortune telling, the investment success of one of the world’s wealthiest men is based on fundamental value investing. If you bind the annual letters of Berkshire Hathaway into a book – which you can in fact buy on Amazon – you may have the only book on value investing you will ever need. Considering Warren Buffet’s investment record, his sage advice on value investing is all you need. Buffet repeats the same themes in his newsletters.
Invest in Businesses, Not Stocks – Buffet does not look at a stock’s price or beta – volatility of a stock price, he looks at the underlying business. A value investor wants to know what the asset is going to do; a speculator wants to know what the price is going to do, says the oracle. Think like a business owner.
Be Able to See the Future – It is essential to be able to see the future of a business. What short- and long-term trends will affect that future – costs, prices, competition? This is as important as the intrinsic value calculation. What cash will the business generate and how does it compare to its stock price? “20% of Fortune 500 companies will be earning significantly less in five years,” says Buffet.
Love the Business – The owner should love the business. You should like the business so much that you use its products.
Invest Back in the Business – The business is generating good returns on capital and investing earnings back into the business.
Thomas Rowe Price Jr. – The Growth Investor
Thomas Rowe Price’s search for growth stocks in growth industries helped him grow his investment firm to $300 billion in assets. He looks for long-term earnings growth with new highs at the peak of each business cycle indicating continuous growth. This growth is found in new industries and products, and specialty industries. Price looks for companies with:
Strong R&D – Strong competency in research and product development.
Little Interference – Low exposure to competition. Little interference from government, consumer or labor regulation
Reasonable Price – A PE ratio lower than the historical average.
EPS Growth – Earnings per share growth greater than inflation, as well as a 10% return on invested capital and high profit margins, above industry average
George Soros – The Hedge Fund Manager
A $1000 investment Soros’ flagship fund in 1969 would be worth $4 million today – a 30% annual return (Investopedia).
George Soros is best known as the man who broke the Bank of England by shorting the British pound for a cool profit of $1 billion. His investment style, a global macro strategy, involves taking highly leveraged bets on the direction of foreign currencies, commodities and other securities based on macroeconomic events. Soros’ positions are large but he is in fact more conservative than some speculative investors. He says he only puts 30% of his capital at risk at any time.
Timing – Timing is the gift of the short-term trader. “The object is to recognise the trend whose premise is false, ride that trend and step off before it is discredited.”
Cut Your Losses – Know when to withdraw from a losing position. And above all, recognise and learn from your mistakes.
Reflexivity – A method of valuing assets, Soros analyses how other investors are valuing assets.
Scientific Method (Test the Waters) – Soros often takes small stakes to test out a strategy. If it is successful, he takes a bigger position.
Soros is known for his political savvy and connections, which he uses for insight into which way the market is going to move.
Three very different investment styles from three phenomenally successful investors. A common theme is a high level of discipline in consistently applying their proven investment strategies. All three have suffered very public losses and gains but have recovered by refusing to follow trends and crowds and instead sticking to what they know best.
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