The world’s best investors have developed a number of highly successful investment strategies in decades past. Some of these investors started out with as little as $100 and today boast fortunes worth billions.
We thought we’d take a look at the lessons from three of the world’s most successful investors and see how they can be put into practice.
1. Warren Buffett
It’s fair to say that Warren Buffett was born to invest. Known as ‘The Oracle of Omaha’, after the Nebraskan city where he was born, Buffet is one of the best known names in the investment world today. He started out with just US$100 to invest in 1954, and today he is worth $39 billion. His company, Berkshire Hathaway, has $372 billion in assets.
Lesson: “Be fearful when others are greedy and greedy only when others are fearful.”1
Many people start investing when there’s a lot of hype around markets going up. This usually coincides with investments being overvalued and possibly at all-time highs. On the flip side, investors often sell investments when there’s talk of markets falling. This is usually when those investments are undervalued, because everyone else is also offloading them. Both of these are not clever approaches to building wealth.
Buffet learned over the years that the only way you can really make the most of your investments is to have consistent exposure to the markets, so that you’re buying low and selling high during all market cycles.
2. John Templeton
At the start of World War II when investors were bailing out of investment markets, Templeton knew he had to ‘be in it to win it’. He sank US$10,000 into undervalued companies across the board, and four years later this approach netted him more than $40,000.
Lesson: “The best time to invest is when you have money. This is because history suggests it’s not timing which matters, it’s time.”2
Templeton’s lesson highlights why dollar-cost averaging is so powerful. This strategy, where money is invested into the market at regular intervals, means you avoid the (potentially ill-fated) temptation to time the market.
The good news is that the superannuation system effectively does this for you. The nature of regularly contributing to super means you’re drip-feeding your investments into the market regularly and over a long period of time. A key advantage of this is that when markets are weak, like they are now, you’re buying more units for your dollar. And when they’re strong, you’re resisting the temptation to buy more when prices may be overvalued.
3. Bill Gross
Considered the world’s leading bond fund manager (he’s called the “king of bonds”) Gross is an expert in spreading risk, calculating odds and diversifying opportunities. He is the founder and managing director of the Pacific Investment Management Company (commonly called PIMCO), which manages more than US$1.35 trillion in assets for investors and institutions worldwide, including MLC.
Lesson: “Diversify, but don’t diversify yourself so much you’re left with portfolio mush.”3
Gross is a big believer in intelligent diversification. Even if investors really like a particular investment option, he recommends they put a maximum of 10 per cent or so of the money they have to invest into it to minimise the risk. That said, he doesn’t believe in diversifying for diversity’s sake; rather he advocates investing selectively to get the best returns.
If you’d like to more information on managing your investments, speak to your financial planner.
1 Source: Berkshire Hathaway 2004 Chairman’s Letter
2 Source: Mark Mobius, Executive Chairman, Templeton Asset Management, quoted on iStockAnalyst, courtesy of Bloomberg, 2 September 2011.
3 Bill Gross, Bill Gross on Investing, John Wiley & Sons, 1998.