The Great Investors: Lessons on Investing from Master Traders

416 Pages·2011·2.23 MB·English

by  Glen Arnold

GLEN ARNOLD
LESSONS ON INVESTING
FROM MASTER TRADERS
BENJAMIN GRAUAM ANTHONY BOLTON
JOHN TEMPLETON CHARLES HUNGER
WARfiEN BUFFETT GEORGE SOROS
PETER LYNCH PHELfR FISHER
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The Great Investors
Lessons on Investing From
Master Traders
Glen Arnold
Financial Times
Prentice Hall
is an imprint of
PEARSON
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First published in Great Britain in 2011
© Glen Arnold 2011
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ISBN: 978-0-273-74325-5
British Library Cataloguing-in-Publication Data
A catalogue record for this book is available from the British Library
Library of Congress Cataloging-in-Puhlication Data
Arnold, Glen.
The great investors : lessons on investing from master traders / Glen Arnold,
p. em.
Includes bibliographical references and index.
ISBN 978-0-273-74325-5 (pbk.)
1. Capitalists and financiers—Case studies. 2. Investments. 3. Investment analysis. I. Title.
HG4521.A73 2011
332.6—dc22
2010040718
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trade in any form of binding or cover other than that in which it is published, without
the prior consent of the Publishers.
10 9876 5 432
14 13 12 11
Typeset in 10.5pt New Caledonia by 3
Printed by Ashford Colour Press Ltd., Gosport
Contents
Preface v
Acknowledgements x
Chapter 1 Benjamin Graham 1
Chapter 2 Philip Fisher 59
Chapter 3 Warren Buffett and Charles Munger . 101
Chapter 4 John Templeton 169
Chapter 5 George Soros 225
Chapter 6 Peter Lynch 283
Chapter 7 John Neff 321
Chapter 8 Anthony Bolton 353
Bibliography 397
Index 402
• • •
m

Preface
There are some veiy special people who seem to possess an excep-
tional talent for acquiring wealth. It occurred to me that there
are many other people, yet to make their big break-through, who
would enjoy reading succinct analyses of the techniques used by
the greatest investors to see if there are lessons they could absorb
which would allow them to perform better than the average. I
was thus motivated to investigate the investment approaches of
nine great investors such as Warren Buffett, Benjamin Graham,
Sir John Templeton and George Soros, asking questions such
as: How did these people come to be so successful? What strat-
egies have they used to make their fortunes? Can the 'ordinary'
investor really draw on their techniques?
I needed to explore not just the past triumphs of the
masters, but also the key factors they look for as well as the
personality traits that allow them to control emotion and think
rationally about where to place funds. How did masters of
investment hone skills through bitter experience and triumph
to develop their approaches to accumulating wealth?
What I discovered was that while there is plenty of material
that provides hints and glimpses of the approaches used by
the most successful investors it takes a long time (and much
knowledge) to trawl through it all. The ideas are available; the
problem is that this writing, speeches, etc. is scattered and
often disorganised, thus the essential wisdom is not reachable
in an easy to assimilate form. There is a need for a book that
distils the essence that made such individuals millionaires and
billionaires, one that systematically goes through key ideas and
disciplines in a focused and easily accessible way.
v
vi The Great Investors
Why Choose these Investors?
At first glance it would seem very difficult to choose just a
handful of investors to be classified as 'great', but as I looked
into it I found a high degree of consensus within the investment
community about those who stand head and shoulders above
the crowd. First, these people have a long track record of
success, increasing the chance that their performances are
based on underlying skill rather than luck. Second, when you
examine their ideas and approaches you discover a great deal
of shrewd understanding of the workings of markets and the
minds of other market players. Third, they have an outstanding
knowledge of businesses and how long-term returns are made.
Fourth, they have put into the public domain enough infor-
mation about their investment philosophy to allow us to gain
insight into the key elements. In short, they are universally
recognised as leading investors, i.e. there's no controversy
about why they are included. As far as I'm aware other investors
do not satisfy all four criteria for inclusion. These are the best.
What Do They Share in Common?
It was intriguing to discover that even though each great
investor has developed a unique approach there are number
of common factors. Indeed, the degree to which the investors
draw on similar ideas is striking. Here are some of the common
themes:
• Be a business analyst rather than a security analyst.
Shares should not be seen as counters in a game of chance,
but as claims on a business. Investors need to understand
the underlying business, not focus on stock market price
movements.
• •
Preface VII
• Do your homework. Not only must you be prepared for
hard work to analyse individual companies, but you must
develop a broad social, economic and political awareness.
• Controlling emotion. They have developed the mental
strength to withstand being carried away with the rest of the
market when it becomes over-excited or overly depressed.
Investors need resilience, self-discipline and courage. There
will be long periods when patience is required, interspersed
with the need to act decisively.
• Consistency of approach. Each investor differs from
the others and yet they all maintain a consistency of their
approach over decades - even when they have bad years
they keep faith with their method.
• Simplicity. The key components of investment decisions
are essentially simple - do not over-complicate. See the
wood for the trees. For example, none of the great investors
uses the complex modern portfolio theory constructs such
as the Capital Asset Pricing Model with its beta analysis.
True investment value should scream at you, so detailed and
complex calculations are simply not necessary to give you the
required margin of safety. All the maths you need you picked
up before you were 16.
• Constantly learning from mistakes. Even those great
investors now in their 80s learn new things every day, often
from mistakes. These can be mistakes (a) of omission (e.g.
Warren Buffett is forever publicly berating himself for
missing a great opportunity - he finds plenty of compen-
sating successes though!), (b) of commission (buying a share
that turns out to be bad investment), and (c) of others - learn
from the mistakes of others, you cannot live long enough to
make them all yourself. You will find that the great investors
are constantly reading and learning (biography, science,
• • •
Vlll The Great Investors
stock market history, newspapers as well as company reports)
- they just never stop developing their minds.
• Self-reliance. They have the self-belief that comes from
years of focused hard work and knowledge. They can then
stand aside from the crowd and go with their own logic.
• Reasonable risk taking. They do not gamble. They make
rational, careful analysis of the major risk factors and make
moves when the odds are tilted in their favour. Mistakes and
misfortunes are inherent in investing - even great investors
are wrong more than 40 per cent of the time. They are
careful to always be diversified so they are not risking a high
proportion of their money on one outcome.
These are some of the commonalities that immediately come
to my mind - you may notice a few more as you go through the
book.
Is This Book for Me?
The typical reader will have some acquaintance with basic
investing terms and concepts, but this is not a requirement
to understanding - the book is written to be accessible to
the relatively inexperienced investor. However, the absolute
beginner might want to consult an introductory book on
investing to gain familiarity with some of the investing terms.
I've explain them in my book The Financial Times Guide to
Investing.
Many professional investors and fund managers will buy
this book; in fact, this may turn out to be the biggest market.
This may seem odd - don't they already know this stuff?
Preface ix
No. Why not? It would seem that 95 per cent of them
have a veiy superficial knowledge of investment philosophies
because universities teach algebraic finance and the profes-
sional associations like numerical-based investment material.
It is usually only later in their careers that they realise how
limited these curricula are, and then they search out books
on good investment approaches. Indeed, the ideas for each
chapter were honed when I was asked to present a series
of one-day courses at Schroders Asset Management focused
on investment philosophies and stock market inefficiencies.
While the attendees had been on the formal training courses
that taught them about the technicalities of valuation and the
workings of the markets, they recognised they needed to learn
more about proven investment philosophies.
Do I Have to Read the Book in a
Certain Order?
No. You can read the chapters in any order you like. They have
been written so that they are self-standing.
I hope you enjoy reading this book as much as I enjoyed
writing it.
Glen Arnold, October 2010