Welcome to the final installment of our four-part series on the world’s top investing strategies.
In the first, we discovered value investing. It’s Warren Buffett’s strategy of choice. The idea is that you only invest in really good quality businesses and hold on for the long term. There’s a summarised write-up here.
Then, we dove into the counter-cyclical tactic of contrarian investing. Used by famous investors like Sir John Templeton, Jim Rogers, and Marc Faber. They go against the flow and do whatever the herd isn’t. It’s a bold big-picture approach. My overview can be found here.
Last time, we had a look at my favourite strategy — growth investing. If you invest this way, you’ll be pursuing innovators early on in their business development. The risks are generally amplified, but occasionally the rewards will be too…rewarding investors with multi-digit returns. My rundown is here.
Today, we’ll examine 10 more strategies in a rapid-fire review.
I know: it’s a lot. But besides the big three (Value, Contrarian, Growth), there are simply so many strategies that we’ll never be able to cover them all…
So now, I’d like to offer snippy synopses of the unique strategies applied by 10 of the most famous investors out there.
T Boone Pickens — energy
T Boone Pickens is a famous investor who made his fortune in the American energy industry. His hedge fund, BP Capital (Unrelated to British Petroleum), focuses exclusively in oil and gas. Very niche.
His strategy centres on investing in small, quiet companies…especially ones that are in the refining business. Why? Because he prefers selling picks and shovels, not digging for gold.
The companies that dig for oil tend to be a lot more hit-or-miss than the companies that supply them with drilling equipment. A concept that translates to many industries.
Jack Bogle — passive investing
Jack Bogle is the father of the index fund. His immense contribution to the investing community is a strong push towards passive investing.
In other words, he puts a lot of faith in the market as a whole…and thinks investors would be wise to make broad, long-term investments through indexes and funds.
‘Common sense tells us — and history confirms — that the simplest and most efficient investment strategy is to buy and hold all of the nation’s publicly held businesses at very low cost.’
Jack Bogle, The Little Book of Common Sense Investing
His firm is The Vanguard Group.
Bill Gross — fixed income
Bill Gross focused almost completely on bonds. His work became so influential that investors would use his actions as a barometer for the economy.
His three to five-year forecasts meant that any short-term movements were generally disregarded. He said, ‘Emotions can convince any investor or management firm to do exactly the wrong thing during irrational periods in the market.’
He directed fixed-income specialist firm, PIMCO, and left to go to Janus Capital. His analytical approach has guided bond investors for decades.
George Soros — speculator
While you may not like Soros, you can’t deny that’s he’s a master of money. His short-term speculation style is basically making huge bets on global macro trends.
His most famous speculation move was in 1992, when he borrowed billions of pound sterling and converted them into German marks…the pound crashed. When he converted back and paid back his lenders, he managed to make nearly $2 billion on this risky move alone.
As an investor in a class of his own, Soros has generated more wins than losses…but almost always leaves a trail of broken markets in his wake.
Peter Lynch — chameleon
Peter Lynch is most famous for his remarkable run at the Fidelity Magellan fund…where he outperformed the market by over 13% each year at an annualised rate. It was one of the most stunning streaks ever seen in fund management.
His principles are a mixture of the main three strategies…and he leans one way or another depending on market conditions. His three tenets were only buy what you understand, always do your homework, and invest for the long run.
As a market scholar, Lynch believed that individual investors had a big advantage over funds like his. He couldn’t get into the smaller companies that individuals like you and I can easily buy into. And that means we’ll have a greater chance of nabbing what he calls ‘ten-baggers’.
John Neff — P/E investing
Known as a ‘professional’s professional’, John Neff was the fund manager that fund managers would entrust with their own money. His strategy was curiously simple — he only bought companies with a low P/E ratio.
The P/E stands for price to earnings. So, by seeking low P/E ratios, Neff was essentially a bargain hunter. He sought companies that could be bought for a relatively low stock price, while delivering high earnings.
And as a secondary characteristic to his strategy, Neff would seek companies that were indirectly linked to more expensive ‘hot stock’ companies. For example, he’d buy the diamond miner if the jewellery company was in the market spotlight.
Julian Robertson — big bets
Julian Robertson earned the best hedge fund returns during the 1980s and 1990s. The compound rate of return was reported to be 32%…which is incredible. His fund, Tiger Management, was the largest hedge fund in the world for a period (At 32% return, of course it was).
Put simply, Robertson would invest in a what described as a ‘smart idea, grounded on exhaustive research, followed by a big bet.’
While the ‘big bet’ part is what led to his massive returns, it also resulted in the firm’s downfall. Tiger shut down at the turn of the century. This is one strategy that borders on gambling…even though Robertson managed to make it work for almost two decades.
Carl Icahn — corporate raider
Carl Icahn is a special figure in the financial world. He’s been known as a corporate raider, a vulture capitalist, and an activist shareholder. In essence, Icahn would use his share ownership to influence the direction of the business.
He’d sometimes buy a large stake of a failing business and completely flush out the entire management roster and force the business into a new model. Normally, that was a good move for the business and it would turn around.
If you’re a businessperson with a good mind for how businesses should be run, Icahn’s strategy could be one to try. Buy a majority stake in a business in bad shape…then use your vote to push the business in the right direction. If it goes well, you could be rewarded with a rising stock price!
Bill O’Neil — CANSLIM
Bill O’Neil was an early adopter of computers in the investing world. He developed a special stock selecting system called CANSLIM which led him outperform his peers despite being the youngest person to buy a seat on the New York Stock Exchange (at age 30).
CANSLIM is an acronym which stands for each key factor that O’Neil would look at in a potential stock.
C — Current quarterly earnings per share increasing.
A — Annual earnings increasing over five years.
N — New products, management, or events.
S — A relatively scarce supply and strong demand.
L — Choose leader-companies over laggards.
I — Pick stocks with institutional sponsorship.
M — Determine market direction by reviewing market averages daily.
Jim Simons — quant/technical
I couldn’t write this list without including a ‘quant’. Jim Simons is one of the smartest and most successful quantitative investors out there. His fund, Renaissance Technologies, employs mathematicians to spot anomalies in the stock market.
Then his computer programs would trigger and execute a large number of trades quickly to take advantage of them. Between 1989 and 2016, the fund returned about 40% annually after fees. You’d be hard-set to find a better track record than that.
But there is a risk with quant trading…and its cousin, high-frequency trading. It’s that computers can fail. Programs can be manipulated and can misfire. And when it does, it can be really expensive.
Time to make your own
Now you’ve just heard a lot of strategies…and a few paragraphs won’t do them justice.
I encourage you to dig a bit deeper if one or two intrigued you. Google will serve you well.
As for my own investing strategy, I’m a card-holding growth investor…which means I liken my approach to that of Philip Fisher and T Rowe Price. I look for high-growth potential in the smaller, undeveloped businesses in the market.
It requires a lot of research and attention, but the results can be very rewarding.
I share my tactics…and my stock picks….in my research service, Small-Cap Speculator.
But I’d also encourage you to create your own strategy. Maybe start with a stock or two using the ideas from the all-star investors mentioned in this series.
Soon enough, you’ll be tweaking your approach and developing your very own style.
If you have any questions or concerns about investing, just let me know! I’ll be happy to do what I can to show you how to get started. Reach me at [email protected]
Editor, Money Morning New Zealand
PS: I hope you’ve liked this series. If you have feedback for me, [email protected] is the best way to get in touch. I’d love to hear from you.
PPS: I know there are heaps of other iconic investors that weren’t mentioned. Jesse Livermore, Stanley Druckenmiller, David Einhorn, David Dreman, Michael Steinhardt, and Ralph Wanger to name a few. I’m sorry! There are just too many to cover in this short overview.