How did they do it? The strategies of the world’s greatest investors

 

 

Now aged 84, Nebraska-born Warren Buffett was the most successful investor of the twentieth century. Known as the “Oracle of Omaha” for his wisdom, at one point he was the richest man in the world with an estimated net worth of $71bn.

 

Buffett is a classic value investor. He believes the price paid for a company must be “sensible”, in relation to how much that company can make in profits. Buffett did not pioneer this style – he learned from the father of value investing, Benjamin Graham – but what Buffett did develop is a flexible approach which allows him to adapt over time. For example, he famously avoided technology companies throughout his career, claiming they were too complex to understand. But in 2011 he surprised everyone by taking a stake in IBM. It was simply a good business, he said, even if he broke his own rule.

 

Buffett follows a 12-step system when analysing a company, and disciples of his method are known as Buffettologists. He began outlining his investment views in regular letters to shareholders of his investment company Berkshire Hathaway back in 1970. These letters make for very interesting reading.

 

Surprisingly, in a recent note Buffett said that after his death he wants his estate to be invested in low-cost passive exchange traded funds (ETFs), specifically the Vanguard S&P 500 fund. This reflects his belief in American exceptionalism, as he says “in the past 238 years, who has ever benefitted from betting against America?”

 

While he does invest globally, Buffett is firm in his view that America is the real source of future growth for investors. He rejects the notion that the US’s time as a place of innovation is over, believing there is even more to come.

 

“The mother lode of opportunity runs through America. The treasures that have been uncovered up to now are dwarfed by those still untapped,” he says.

 

STOCKS BUFFETT HAS OWNED INCLUDE: Film company Twenty-First Century Fox, credit card provide MasterCard, and sustainable energy company Suncor Energy.

 

 

 

The most high-profile investor in the UK is Neil Woodford, who managed UK equity income funds at asset manager Invesco Perpetual for 25 years.

 

Woodford is an equity income investor, who focuses on buying companies that can pay a good dividend over many years. Although dividends may be only a few pence per share, re-investing them over time makes a real difference to the overall investment. Over 25 years, Woodford’s shrewd selection of companies that would have good and growing dividends meant an £1,000 investment in the Invesco Perpetual High Income fund turned into £23,000.

 

In 2014 he left to set up his own asset management house, Woodford Investment Management, and now has two new funds. Time will tell whether he is able to replicate the success of his past, but there are important lessons to be learnt from Woodford’s investment style.

 

What is most striking about his Invesco portfolios was the sheer length of time he would hold a stock. For example, he bought shares in cigarette companies British American Tobacco, Imperial Tobacco and Reynolds American in the 1990s, and still holds them today. Back then many investors would not touch these stocks with a barge pole, because they believed increasing anti-smoking regulation would kill tobacco firms. He was proved right, though, because cigarette companies have been able to cut costs, get a foothold into emerging markets and almost monopolise the smoking industry – simply because no other business wants to enter the space.

 

STOCKS WOODFORD HAS OWNED INCLUDE: Defence company BAE Systems, car maker Rolls-Royce, and pharmaceuticals firm AstraZeneca.

 

 

 

John Lee began investing in 1987, when he began putting the full annual allowance into his personal equity plan (PEP), and then its successor, the individual savings account (ISA).

 

This added up over time to a contribution of £125,000, but returns from the stocks in his portfolio grew tremendously, and in 2003 he became the UK’s first ISA millionaire when his portfolio passed the £1m mark.

 

His philosophy is to avoid buying funds and instead be your own fund manager by selecting stocks. He bought one or two companies a year after doing some research, and prefers smaller companies which tend to grow faster than bigger equivalents listed on the FTSE 100. He would not just buy any small caps either. Lee specifically prefers British, familycontrolled businesses which are well established in their sector. He advises against buying exploration, startup or biotechnology companies.

 

Lee’s success lies not just in his small cap focus but also his patience. Although it is tempting to sell a stock when its price has risen, he advises one should hold on as the price will likely rise again. Lee also re-invested all dividends, which over time makes a real difference to the level of capital in a portfolio. (This article has more on the importance of income).

 

STOCKS LEE HAS OWNED INCLUDE: ship broker Clarksons, floor coverings maker James Halstead and PZ Cussons, which owns soaps and shampoo brands.

 

 

 

George Soros is a master of trading and speculation in bond and currency markets. He is known as “the man who broke the bank of England” after he shorted $10bn worth of sterling before the 1992 Black Wednesday crisis – and made over $1bn from the trade.

 

Once an impoverished immigrant to the UK from Hungary, Soros gained a PhD in philosophy at the London School of Economics and developed a theory of “reflexivity”, where the current valuations of an equity market have an effect on future valuations.

 

He founded the Quantum Endowment hedge fund in 1973 to invest on the basis of his theory, and the fund has grown from startup to a beast you would not want to bet against.

 

He speculated on the weakened Thai and Malaysian currencies during the Asian financial crisis in 1997, and has attracted criticism from economists who believe hedge funds like his create crises, rather than simply profit from them.

 

Nevertheless, his Quantum fund is believed to be the best-performing hedge fund of all time, as it has made around $40bn since inception.

 

Soros invests against the herd, selling assets when others are buying and vice versa. This is incredibly hard to do, as it is contrary to humans’ most basic psychology. He also ascribes his success to an ability to admit when he is wrong. This means he pulls out of bad trades rather than making the common mistake of clinging on in the hope the investment will come good. “I'm only rich because I know when I'm wrong … I basically have survived by recognising my mistakes,” he says. 

 

Curiously, Soros is known to tune into his body when making an investment decision. He checks for physical cues, and a backache could be enough to make him think twice.