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February 11, 2016

Learn the The Basics from the 5 Super Investors

The world’s financial markets are subjecting investors to dizzying, intra-day roller coaster rides, with no end in sight. Amid all the bad news and gloomy predictions, how can you determine when the market is too high or low, or which investments to buy and sell?
Turn to the “super investors.” Below, we examine the basic precepts of five of the world’s greatest investors and glean time-tested investing insights that can help you beat the bear – or when the time comes, ride the bull.
Let’s see how these investment wizards became rich and what they have to teach us today.
1) Warren Buffett
As chairman, CEO and largest shareholder of Berkshire Hathaway (NYSE: BRK-A), Buffett follows the school of “value investing” pioneered by Benjamin Graham, whereby he pinpoints securities with prices that are unjustifiably low according to their inherent worth.
However, Buffett takes value investing to a deeper level. He once famously said: “In the short term the market is a popularity contest; in the long-term it is a weighing machine.” He doesn’t necessarily wait for the market to eventually reward the merits of underappreciated stocks; he chooses stocks according to their potential as a company.
Buffett looks for strong balance sheets, good products, market domination, and high-quality management. He emphasizes long-term ownership of a company, not just the chance for capital appreciation based on market dynamics.
How well does he do? Buffett was ranked in 2015 as the third wealthiest person in the world, with a net worth of more than $72.7 billion.
Investors have learned that it pays to follow the buy-and-sell decisions of the Oracle of Omaha. Two recent cases in point that exemplify the “Buffett Way:”
As the energy markets continue to tank, Buffett has surprised Wall Street by purchasing stakes in Phillips 66 (NYSE: PSX), an investment that has paid off handsomely because he had the foresight to see the hidden value in the company’s high-margin refining and chemicals business.
Likewise, Buffett’s has bought International Business Machines (NYSE: IBM), an unloved stock in which he sees enormous potential. While the investment crowd sees a tech dinosaur in IBM, Buffett sees a company in the throes of a corporate reinvention that will soon bear fruit. The company is sloughing off its declining hardware businesses to focus on the higher-margin niches of cloud computing, analytics, and big data.
Buffett’s rules are among those timeless investment methodologies that work in any market, whether it’s up, down or flat. In fact, they work best in times of extreme volatility, just like the market we’re witnessing today.
2) George Soros
As chairman of Soros Fund Management, the Hungarian-born Soros is known as “The Man Who Broke the Bank of England” because of his short sale of US$10 billion worth of British pounds, reaping him a profit of $1 billion during the 1992 “Black Wednesday” currency crisis in the U.K. He also made almost $1 billion shorting Japanese yen in 2012 and 2013.
With a net worth of $24.4 billion, Soros is one of the 30 richest people in the world.
Soros once said: “The concept of a general equilibrium has no relevance to the real world (in other words, classical economics is an exercise in futility).” In other words, by the time all investors have adjusted to change, the rules of the game will change again.
Through some of his boldest currency bets, Soros has earned huge returns by anticipating, understanding and exploiting the knee-jerk, reflexive response of investors to cyclical events. His success epitomizes the enormous gains available if you’re armed with the right information and tools.
3) Peter Lynch
As manager of the Magellan Fund at Fidelity Investments between 1977 and 1990, Lynch racked up an average annual return of 29.2%, consistently more than doubling the S&P 500 and making Magellan the best performing mutual fund in the world.
Lynch’s method is to catch the turning point in a company’s fortunes, to invest in a company just when a material change occurs that will eventually spawn a corresponding movement in its stock. His strategy is to conduct diligent research, to unearth changes in key variables that will boost share prices in the future
Akin to the value-oriented Buffett, Lynch looks for intrinsic worth in a company. He advocates looking at stocks for their own value and eschews top-down macro analysis.
During Lynch’s legendary tenure as manager of Magellan Fund, assets under management grew from $18 million to $14 billion (that’s billion with a “b.”).
Lynch and Buffett both knew an inalterable truth about investing: No matter how high or how low a stock price goes, it will eventually return to its true value.
4) Benjamin Graham
As the “Father of Value Investing,” Benjamin Graham is known for being the mentor to Warren Buffett. He also wrote one of the most influential investing books of all time, The Intelligent Investor (1949), in which he fleshes out his investment philosophy.
As Graham wrote in The Intelligent Investor:
“Though business conditions may change, corporations and securities may change, and financial institutions and regulations may change, human nature remains the same. Thus the important and difficult part of a sound investment, which hinges upon the investor’s own temperament and attitude, is not much affected by the passing years.”
In these volatile times, the lesson is clear: resist the herd mentality and stay focused on true value. When headlines become dark, as they are today, most investors behave like lemmings and march right off a cliff. They succumb to the “group think” of the media, friends, the Internet, colleagues, family — everyone telling them what stock or investment to buy or sell, everyone ready with brilliant advice. Graham’s simple advice: think for yourself.
5) The Man Behind “The Third Rule of Investing”
We’ll get to our fifth investment wizard in a minute.
Warren Buffett once said: Rule No. 1 in investing is “Don’t lose money” and Rule No. 2 is “Don’t forget rule No. 1.”
What the Oracle meant is that capital preservation takes precedence over capital growth, and if you’re capable of handling the downside, the upside will take care of itself. But there’s also a Third Rule that most investors haven’t heard about.
As a young man, the super-investor who pioneered this rule received $27 million from wealthy individuals to start a hedge fund, which he eventually grew to almost $30 billion in assets. Today, he’s personally worth $1.47 billion.
Courtesy of Robert Rapier, Investing Daily (More from Investing Daily Here
The Dolce Whey at Onnit.com!
The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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