Over time, and in particular since the 1920’s, the investment industry has professionalized and produced many different philosophies and investment styles. The technical and fundamental aspects of investment are now taught as academic subjects in further education, used as the basis for MBA’s in business schools and for professional qualifications.
Several high profile investors have contributed to the development of investment as a profession. We will look at the most influential investors of the last 100 years, from Benjamin Graham onwards. By outlining their philosophy, we can see which elements of their investment philosophy are relevant to the everyday investor.
Group 1: Value investors
This group is made up of those investors who worked with Benjamin Graham or are influenced by Graham and the most famous current proponent of his style, Warren Buffett.
Benjamin Graham – Graham wrote one of the most famous investment theses of all time, “The Intelligent Investor”, which is a textbook guide to fundamental analysis (the method of looking into the financial health and growth prospects of a company). For Graham, a good investment was one that showed value (the shares were not overpriced in relation to a fair valuation) and which represented a low downside risk (low debt levels, healthy profit margins). A direct result of his work was the incorporation by law of financial transparency of companies listed on the US stock market.
Warren Buffett – a student and then colleague of Graham’s, Buffett is the most famous investor of all time. Through his fund management arm, Berkshire Hathaway, he has built a large following of everyday investors and further developed Graham’s philosophy of value investment. He believes that investing is for the long term, and that an investment should only be made at a discount to its fair valuation. Other guidelines that he follows are:
Ensure a margin of safety, or protection from downside risk by recognizing that not everyone will have the same definition of fair value.
Invest in a company that is debt-free or has very low levels of debt.
Look for healthy dividend yields.
Companies should have stable and / or growing profit margins, showing that they are able to generate cash and fund their own growth.
Do not invest in any company which is involved in a business that you do not understand, or which is heavily dependent on a commodity such as Oil and Gas.
Charlie Munger – the business partner of Warren Buffett, Charlie Munger is known as the more contrarian and assertive in the partnership. Like Buffett, Munger has chosen to gift almost all of his wealth to philanthropic causes. Munger has supported Buffett in his quest to find undervalued companies that are in difficult situations, and which other investors have been afraid of investing in.
Group 2: Contrarian and other philosophies
George Soros – the most famous short-term investor of current times, Soros has made his money by taking aggressive bets on the direction of foreign currencies, commodity prices and equities based on his macroeconomic forecasts. His most famous trade remains his bet in 1992 that the British Pound would decrease in value against the German Mark. By borrowing billions of Pounds and converting them into Marks, he was able to exploit the difference when the Pound crashed by buying the Pounds back with the more valuable Marks. Controversial and not always popular, Soros is still an influential voice in macroeconomics.
John Bogle – the founder of Vanguard, one of the largest fund houses in the world, Bogle played arguably the biggest part of any fund manager in popularizing mutual funds. He did this by creating funds with lower fees and pioneered the use of index funds - passive investing that follows the composition of the stock market. He has consistently supported the use of index funds for the everyday investor alongside low fees, rational analysis and a long-term investment horizon.
Bill Gross – the founder of Pacific Investment Management Company (PIMCO) and philanthropist, PIMCO has consistently been placed as the largest bond fund in the world. Gross is famous as the Las Vegas casino worker with two university degrees, who says that he learnt most of his investment skills at the blackjack table: never borrow too much and never risk too much of your capital. In 2011, he warned against investing in US Treasuries at a time when the returns were at risk due to inflation.
Peter Lynch – the now retired manager of the Magellan Fund at US fund house Fidelity, this fund achieved consistently higher than average returns and grew from $20 million to $14 billion under his stewardship. An active proponent of the “never off” approach, Lynch worked around the clock researching and talking to companies. He invested using a fundamental approach, and his published books outline his investment philosophy:
Only invest in what you know about
The importance of good management of a company
Do not attempt to predict macroeconomic indicators such as interest rates
Use common sense when looking at a company’s fundamentals: can you describe what it does and why you are investing?
- Many of the most successful investors pursued investment ideas over a long period and regarded the potential investment as a “lifetime” holding.
- Some investors stick to sectors where they have direct commercial experience – often investing in “what you know” is advisable if you are going it alone.
- Common sense and never over-paying is the most helpful tool for the everyday investor. If an investment is too good to be true, then it generally is