6.5: All Stars of Investing

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“As with any human endeavor, whether it is athletic competition, the performing arts or technological innovation, some people clearly perform at a higher-than-average level.” – Mark Denning, mutual fund manager with over 35 years experience

As Mr. Denning makes clear, some people perform at a higher-than-average level, over statistically significant periods of time. As students of investing, it pays for us to study those individuals and learn from them. The good news is that we don’t have to win as big as they did. We just have to win.

Peter Lynch

Peter Lynch was the mutual fund manager of the Fidelity Magellan Fund from 1977 to 1990. In that time, he racked up a 29% per year average annual return. His book, One Up On Wall Street, is an excellent introduction to the concepts and practice of stock investing. It is one of the two books that we recommend as your first book to read. (The other is A Random Walk Down Street, discussed earlier.) He also wrote two other books that are likewise good reads, Beating the Street, and Learn to Earn: A Beginner’s Guide to the Basics of Investing and Business. However, One Up On Wall Street is his most popular and powerful offering. Read it!

Mr. Lynch champions the idea that you should invest in businesses that you know and understand. The idea is encapsulated in the phrase, “Buy what you know.” Critics accused Mr. Lynch of trivializing the practice of investing by saying people should buy the stocks of companies that they know and understand without doing more research. This is a wrong-headed criticism. Mr. Lynch never said anything of the sort. He used the idea as just a starting point. Of course, he wanted investors to then do the proper research and investigation. Obviously, those critics had never read his book.

Warren Buffett

In this day and age, Warren Buffett needs no introduction. He is idolized and quoted and looked up to by countless investors. The annual shareholders’ meeting of his company, Berkshire Hathaway, is often called the Woodstock for Capitalists. He is the consummate Fundamental Analysis investor, putting emphasis on the value of the entire company. His adage is, “Don’t buy a stock. Buy a company.” In other words, you are researching a company and you find that you like the business and its prospects. If you had the tens or hundreds of billions of dollars it would take to buy the company outright and you would do it, then go ahead and buy 10 shares.  Mr. Buffett’s resources are such that he indeed is prone to buy the whole company! 

Benjamin Graham

Benjamin Graham was Warren Buffett’s teacher and mentor. Mr. Graham is called the Father of Value Investing. He wrote what is typically referred to as the best book ever written about investing, The Intelligent Investor. Eventually, you must read The Intelligent Investor. However, we strongly recommend against reading it as your first book on investing. Mr. Graham’s prose is at times difficult to penetrate and at other times, it is overly flowery. For this reason, all new editions of The Intelligent Investor have a commentary after every chapter. The commentaries are written by Jason Zweig, an excellent investment writer in his own right. Mr. Zweig will bring the material back to Earth and let you know, “Okay, here is what Old Ben was trying to say.”

John Templeton

Sir John Templeton was also a student of Benjamin Graham. He was Knighted in 1987 for his philanthropic efforts. Becoming a Knight is no small feat for a kid from a small town in Tennessee! Sir John was one of the first investors to venture out of the comfortable confines of the United States and invest abroad. Indeed, the Templeton Growth Fund was one of only three global mutual funds on our chapter 2 list of mutual funds with over 50 years of experience that had a 10% or better average annual return. Sir John was also very much involved in philanthropic and spiritual matters and his spirit lives on in the Templeton Foundation.

Bill Miller

Bill Miller was the money manager for the Legg Mason Value Trust, now called the Clearbridge Value Trust. His is a cautionary tale of what the investment industry can do to a person. At the helm of the Legg Mason Value Trust, Mr. Miller was able to beat the S&P 500 index for an unprecedented 15 years in a row. Correspondingly, Mr. Miller became yet another investment celebrity, the media hanging on his every word. Mr. Miller was not particularly happy about his situation, publicly noting that the streak was an accident of the calendar. He noted that if the year had ended in any other month, there would not have been a streak. Mr. Miller is known for his saying, “any stock can be a value stock if it trades at a discount to its intrinsic value.”

So why is this a cautionary tale? After his 15-year streak that ended in 2006, the returns of the Legg Mason Value Trust began to badly underperform the market, especially in 2007 and 2008. Although he did well in 2009, he again badly lagged the market in 2010 and 2011. In 2012, he retired from Legg Mason. It’s a tough business. As Louis Rukeyser, the host of Wall Street Week with Louis Rukeyser for over 30 years, was fond of saying, “So what have you done for me lately?”

What do all these people have in common? They had the courage to not follow the crowd because the “conventional wisdom” is usually not very wise. However, most importantly, they had an eye for unrecognized value, similar to a “sixth sense.” This gave them the ability to sniff out value that others missed. In the world of chess at one time, Garry Kasparov and Anatoly Karpov were the two best players in the world. Mr. Kasparov was once asked why this was so. Why were he and Anatoly Karpov the two best chess players in the world? His answer was astonishingly simple and direct. “We attack better than anybody else and we defend better than anybody else.” These All Stars of Investing bought the best companies and they avoided the worst companies.

Charles Steadman (???)

Speaking of avoidance, as a mutual fund investor, Your Humble Author is not looking to find the next Peter Lynch or Bill Miller or Warren Buffet. Instead, I am looking to avoid the next Charles Steadman. Who was Charles Steadman, you ask? He was often referred to as the Rembrandt of Red Ink. Charles Steadman ran his own mutual fund, the Steadman American Industry Fund, from December 1959 until his death in late 1997. During one of the greatest expansions of the global economy in human history, he had a negative return over almost 40 years! His cumulative total return was -42.9%. He would have done much better simply placing his investors’ funds into a savings account at a bank. He would have done better putting it in a mattress! Why did the investors in his funds stay with such horrible investments? The simple answer is most of them were dead.

Let’s highlight some useful advice from our All Stars.

“Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

Mr. Buffett is paraphrasing his mentor, Mr. Benjamin Graham, who said, “Buy when most people including experts are overly pessimistic, and sell when they are actively optimistic.”

“Bear markets are born of pessimism, grow on skepticism, mature on optimism and die on euphoria. The time of maximum pessimism is the best time to buy.” – Sir John Templeton

On a similar note, Sir John also famously said, “To buy when others are despondently selling and sell when others are avidly buying requires the greatest fortitude and pays the greatest reward.” Did Sir John take his own advice? Oh, yes, he did!

“When World War II began in Europe in 1939, he borrowed money to buy 100 shares each in 104 companies selling at one dollar per share or less, including 34 companies that were in bankruptcy. Only four turned out to be worthless. He turned large profits on the others.” ‒ Templeton Foundation

The time of maximum pessimism is indeed the best time to buy. Our last quote is attributed to Nathan Rothschild, a 19^th-century British financier and member of the Rothschild banking family. “The time to buy is when there is blood in the streets.” Now that is contrarian investing!

If these stories about professionals in the industry pique your interest, consider reading Wall Street People by Charles “Charley” Ellis with James Vertin. Although this book is a bit outdated, it contains a treasure trove of stories about the men and women that populate the investment world. (It’s mostly men but we are changing the world. Isn’t that so, Ladies?) Some are heroes, some are villains, some are just regular folks trying to do the best they can in a high stress world, all are interesting. In addition, please note that anything that “Charley” writes is worth reading. Mr. Ellis is also noted for coining the term “The Loser’s Game” for short-term speculation and trading of securities.