Making decisions about investments can be bewildering. There are so many choices concerning when to invest, what mix of different investments to pick and when to change a plan — among other considerations.
To sort through these questions, consider what some of the most renowned investment experts have practiced themselves. Four of the sharpest minds to ever consider the stock market laid out core principles to illustrate their paths to success. Review a few of their insights which might provide ways for everyday investors to decide what investment plans make sense for them.
Benjamin Graham was one of the founding fathers of personal investment philosophies. A British-born economist, he believed that there were ways to minimize the risks of investing through prudent research into the companies involved. Among his most prominent disciples in investing: Warren Buffett.
To Graham, investing required a thorough analysis of the companies that were potential investments. Graham knew that many stocks seem cheap, but that the best investments were in those companies that had fundamental value that would likely reemerge over the long run. It was those companies that would bring the most likely return on investment. Outlining the core of this philosophy would make Graham the grandfather of what now is considered value investing: looking for companies that have fallen from grace on Wall Street and investing in them while their stock prices are lower. The other half of the plan, of course, was to sell those same stocks once they had risen to a value that made them no longer a bargain.
Another advantage Graham advocated was if the companies’ stock prices were low at the start, the likely loss from those who couldn’t provide increased returns would be reduced. Graham called this combination of research and affordable prices the margin of safety that gave investors the comfort level to keep pursuing their goals, even after setbacks.
Only investors who have hours to devote to research and analysis of their individual stock picks have the time to take on value investing with Graham’s approach. For them, value investing, developed as a Graham innovation decades ago, is still a profitable way to make investments. For most investors, though, the better way to pursue this type of investment might be through a value investing fund. These funds are managed with the goal of concentrating on the stocks that are undervalued but have the potential to rebound. Such funds can also provide a counterbalance in a portfolio that has numerous funds that are investing in potential high-growth stocks.
Warren Buffett is probably the most famous investment guru in the world, known for the huge wealth of his company, Berkshire Hathaway, and by the nickname “Oracle of Omaha.” Despite his status as one of America’s richest people, Buffett is still known for keeping his simple Midwestern style amid all of his success.
Buffett showed an interest in business and investing when he was still in his teens. As a college student, he took a course from Benjamin Graham and has been quick to credit him as a mentor in his own investment strategy. Like his mentor, Buffett is interested mostly in long-term investments in companies whose business model makes clear sense to him — but Buffett frequently wants to buy the company and help guide it to success.
One of the keys to Buffett’s philosophy is to invest in companies that have a definable market niche and, to him, a business advantage. In years past, he was famously leery of investing in Internet-related businesses, in part because of the fluidity of that industry and what he admits is his own lack of expertise. Buffett is always more interested in the company’s prospects for future success than its current place in the market, once writing to investors: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”
Another key to Buffett’s success: patience. When he believes a company will succeed, he is prepared to let that possibility play out and not be scared off by short-term setbacks. “We don’t get paid for activity, just for being right. As to how long we’ll wait, we’ll wait indefinitely,” he says.
Once he likes a stock, Buffett lets that knowledge play out over years, not weeks. He knows that a company’s fortunes can take that long to change. Investors also would keep in mind that stock transactions have a cost, one that eats into profits and takes more money after a loss.
Sir John Templeton
Sir John Templeton defied trends, in life and investing. He was raised in Tennessee but eventually became a knighted British citizen, and he advocated buying stocks or bonds when others were selling. He began his investments as a young man when he borrowed $10,000, a considerable sum in the late 1930s. Believing that panic had made the whole stock market cheap, he bought shares in more than 100 companies whose stocks were trading at less than $1 per share. Even at that dark time with World War II looming, he eventually made money on all but four of the stocks.
Templeton would go on to become a successful portfolio manager, and eventually the portfolio of funds he helped launch would become part of Franklin Templeton Investments.
One of the key pieces of wisdom that Templeton shared with investors was the need to diversify. Even the smartest investor cannot be perfect, he warned, so he believed it was necessary to have a diverse investment portfolio to diminish the overall risk. “In stocks and bonds, as in much else, there is safety in numbers,” he says.
To Templeton, diversified investment meant spreading the risk among several investments such as stocks and bonds, across different investing sectors and even into international investments. He was an early advocate of seizing overseas opportunities.
For a modern investor, diversity in investments is available in several ways. Index funds buy stocks in a broad range of companies, and sometimes are weighted to reflect the movement of a whole stock market or market sector. This protects the investor from the up-and-downs of a narrow portfolio. It’s also easier for investors to invest overseas, thanks to stock funds that select a range of companies to invest in. Funds can be dedicated to particular countries or regions or include stocks from around the world.
Templeton was also advocate for taking a clear-eyed approach to investment returns. To him, this included not just the return on the stock or bond purchased, but also the taxes and fees that were generated and the eroding effects of such market forces as inflation. “Any investment strategy that fails to recognize the insidious effect of taxes and inflation fails to recognize the true nature of the investment environment and thus is severely handicapped,” he says.
Investors who want to adjust their portfolios to reduce the effects of taxes can look at a variety of investment vehicles. Individual Retirement Accounts, or IRAs, are a popular way to defer paying income taxes until later in life, when many investors will have a lower overall tax rate.
Inflation has been fairly docile in recent years, but investors still want to be aware of what it does to erode investment performance. Certificates of Deposit, for instance, are a very stable and reliable investment option, but rates of return often look less flattering when compared to inflation.
Peter Lynch became known as an investment superstar for his work at Fidelity Investments. He helped build Fidelity’s Magellan fund into an investment colossus, one that rose in value massively as Lynch found some of the boom stocks of his era. While Lynch was known for picking stocks that were poised to skyrocket, he also approached investing with flexibility. If bonds or certificates of deposit were offering better returns than stocks, Lynch quickly would shift the resources of his fund that way.
Lynch was an advocate for keeping your eyes open for the opportunities around you, that you can see in your own life. Famously, Lynch invested in the company that sold L’eggs pantyhose because his wife bought them without having to make a trip to a department store, which he rightly saw as a market advantage. The product was a hit, and the parent company eventually bought out, with a huge increase in stock price.
Lynch posted his spectacular returns as a fund manager in part by finding and appreciating those few stocks that would provide massive growth and discarding the rest. “Some stocks go up 20 to 30 percent, and they get rid of it and they hold onto the dogs. And it’s sort of like watering the weeds and cutting out the flowers,” Lynch says. “You want to let the winners run.”
Investors who want to add Lynch’s wisdom to their own approach should consider investing in businesses that they can understand, either because of their own knowledge in the field or because it is located locally. “If you own auto stocks you ought to be very interested in used car prices. If you own aluminum companies you ought to be interested in what’s happened to inventories of aluminum,” Lynch says.
The fundamental concepts that these investment leaders exhibit is that investing is more than prices, buyouts and dividends. Investing also is about confidence, risk and the comfort level to get a good night’s sleep. Not every investor is the same, and there’s no one right answer for everyone. But the principles outlined by these finance visionaries help lead the beginner down a path toward personal investment success.