Embarking on the journey of investing is akin to navigating a vast and intricate landscape, where the wisdom of experienced investors serves as a valuable compass. Great investors throughout history have left behind a trail of insights, strategies, and philosophies that continue to guide and inspire those seeking financial success. In this exploration of the great learnings from great investors, we delve into the principles that have withstood the test of time, offering a beacon for both seasoned and aspiring investors. From the patient strategies of Warren Buffett to the innovative thinking of Benjamin Graham, these lessons provide a roadmap, illustrating that successful investing is not merely about predicting market movements but rather understanding the fundamental principles that govern the world of finance. Read on to know more about the pearls of wisdom left by the titans of investment.
Table of Contents
Benjamin Graham
Benjamin Graham is a legendary investor, economist, and professor. Known as the Father of Value Investing, he wrote two very popular books: Security Analysis and The Intelligent Investor. The former laid the groundwork for a systematic and analytical approach to evaluating securities, emphasising the importance of thorough fundamental analysis. In the latter Graham distilled his investment philosophy into accessible principles, advocating for a conservative and disciplined approach.
What Graham Teaches Us
Look for Intrinsic Value, Not Market Price
In value investing, the main rule is to look at the intrinsic value of the firm. If the intrinsic value is lower than the market value, an investor should hold the stock until a mean reversion. The mean reversion is where the market price and intrinsic prices converge.
To avoid buying the stock or selling at the wrong time, always look at the intrinsic value not only the market price.
Don’t Follow the Herd
Investors are human beings and humans are, by nature, emotionally driven. They are always willing to buy or sell a stock at prices which everyone follows. Due to this, the second popular tip by Graham is to avoid the herd or crowd. Since the market moves often and wide, diligent investors will be able to buy and sell smartly if they do fundamental research right.
Be Aware of Your Investment Personality
Graham urges investors to introspect and be aware of the type of investor personality category he or she belongs to. According to him, investors belong to either of two categories: an enterprising investor or a defensive investor. The enterprising investor will invest in stocks while defensive or cautious investors will opt for investment in index funds.
Graham also differentiates between an investor and a speculator. The former views his stocks as part of business while the latter views it as an expensive paper. One should have the ability to realise which type of investor they are.
Warren Buffett
Warren Buffett is, perhaps, the most famous investor in the world and has made a fortune through his investments. Buffett’s investment style is similar to Benjamin Graham’s, as he was a student of Graham’s. He focuses on long term value investing.
What Buffet Teaches Us
Invest in Yourself
According to Buffett, the most valuable investment one can make is in their own abilities, recognising that each individual possesses a unique set of qualities that cannot be taken away. Given that the majority of people won’t derive their primary income from the market, having a contingency plan is crucial. Developing skills to enhance personal careers is essential, and Buffett exemplifies this by investing in a course to improve his public speaking skills during his youth, a skill that proved invaluable when selling stocks.
Understand Before Investing
The second tip is to invest only in companies that you can understand. Buffett suggests that before purchasing a stock, an investor should understand the main drivers of the business and how the business generates profit. If the business model of a company is too complicated, or if an accurate prediction is needed to decide whether the business is a good buy, an investor should look for another investment.
Buy to Hold
Buffett believes in the buy and hold policy. In value investing, if an investor purchases an undervalued stock, the stock price will eventually increase. If the company is exceptional, then the stock value will increase exponentially as the investor holds onto the stock longer.
Peter Lynch
Peter Lynch is one of the most successful investors in the world. Renowned for his exceptional financial acumen, Lynch served as a former mutual fund manager at Fidelity Investments, leaving an indelible mark on the investment landscape. His legacy is particularly notable during his tenure as the manager of the Magellan Fund, where he achieved the remarkable feat of transforming it into the best-performing mutual fund globally. Beyond his accomplishments in the financial realm, Lynch has also embraced philanthropy, contributing to the broader community and solidifying his impact both as an investor and a benefactor.
What Lynch Teaches Us
Proper Research is Important
It is important as an investor to look beyond what is visible. Promising stock ideas are available and visible, but there are other companies working to help those stocks rise. For e.g., if you see a successful stock from a particular company in the market, it is visible to everyone. Wise investors should broaden their perspective to consider the surrounding companies and factors contributing to a stock’s success, recognising that investing in these elements can yield significant benefits.
Consider Mutual Funds
Mutual Funds are a great alternative when it comes to investments. Peter Lynch once said, ‘Equity mutual funds are the perfect solution for people who want to own stocks without doing their own research’. Maybe you are one of those investors who don’t have the time or interest to do your own research about a company before investing in stocks, in that case, mutual funds can be your saviour.
Expect Losses
As an investor, you should never expect only success. Losses are bound to come your way. Peter Lynch once said, ‘In this business, if you’re good, you’re right six times out of ten. You are never going to be right nine times out of ten.’ Losses do not mean you are a bad investor, this is something which is bound to happen.
Buy What You Know
If you have been following Peter Lynch, you would be aware that he made Buffet’s statement, his mantra, i.e., to invest only in what you understand. He sternly believes that investors can invest well if they are aware of the company, its business model and its fundamentals.
Mogul Rakesh Jhunjhunwala
Rakesh Jhunjhunwala is an Indian chartered accountant, investor, and trader. He is often referred to as India’s Warren Buffet and the Dalal Street Mogul. He is the forty-eighth richest person in India and is the founder of the company Rare Enterprises, an asset management firm.
What Jhunjhunwala Teaches Us
Long Term Investments
A firm believer in long-term investments, Jhunjhunwala once said that it is important to give investments time to mature. Picking good funds or stocks will not be sufficient or good enough if you don’t hold them for a long time. He says that holding equity mutual funds is also a good investment to make.
Avoid Emotional Investments
He rightly says that emotional investments are a sure way to make a loss in the stock markets. Emotional investments include panic-buying during a recession or buying too much when the market is doing well. He says that selling during a recession will only cost loss and letting greed drive you to buy more when the markets are doing well can cause you to buy too much.
Never Depend Only on Historical Data
Jhunjhunwala says that you should never depend only on data from the past to make choices about the present. It is important to understand the market completely and make a choice. When one depends only on historical data, it is possible emotions and irrational thinking may play a role. One should not expect the past to repeat itself since the stock markets are very sensitive to various areas like the economy, buying methods, etc. Historical data can lead to sticking to non-performing investments which will keep you hoping that the best is yet to come.
Ray Dalio
Dalio is a billionaire hedge fund manager and co-chief investment officer and founder of Bridgewater Associates. He is a realist, and he’s vocal about the challenges amateur investors face.
What Dalio Teaches Us
Diversify
Diversification spreads out your risk across multiple assets. It’s the practical application of not putting all your eggs in one basket. Diversification reduces your dependence on the performance of any one security. And when it’s done right, diversification also protects you from the extremes of market volatility. Dalio recommends diversifying across industries, asset classes, and even currencies.
Take Risks
Dalio, whose initial investment was a $5/share purchase in a bankrupt airline, which ultimately tripled in value, holds a profound appreciation for the inherent risks of stock market investing and advocates for mitigating such risks through strategic diversification.
Past Doesn’t Guarantee Future Performance
The price of any investment should represent that investment’s ability to create value in the future. Unfortunately, the stock market doesn’t always work that way. When investors get excited about a sector or company, stock prices rise. Investor excitement and the resulting price increase may or may not be accompanied by an improvement in underlying fundamentals.
Conclusion
The invaluable lessons from legendary investors provide timeless guidance for navigating the dynamic financial landscape. These insights, ranging from the principles of value investing to the emphasis on personal development and diversification, serve as a beacon for contemporary and future investors. Embracing these lessons fosters a more informed, disciplined, and resilient approach to wealth creation, drawing inspiration from the triumphs and strategies of investment titans whose legacies continue to shape the narrative of financial stewardship.
