“Fillet of a fenny snake,
In the cauldron boil and bake;
Eye of newt and toe of frog,
Wool of bat and tongue of dog,
Adder’s fork and blind-worm’s sting,
Lizard’s leg and owlet’s wing,
For a charm of powerful trouble,
Like a hell-broth boil and bubble.”
– W. Shakespeare, Macbeth, Act IV, Scene I.
Benjamin Graham’s Criteria for the Defensive Investor:
P/E Ratio less than 15.
P/Book Ratio less than 1.5.
Book Value over 0.
Current Ratio over 2.
Earnings growth of 33% over 10 years.
Uninterrupted dividends over 20 years.
Some earnings in each of the past 10 years.
Annual revenue of more than $100 Million (1950).
<< The Intelligent Investor >>
Quotes
“Rejecting technical analysis as a method for investing, Templeton says, “You must be a fundamentalist to be really successful in the market.”
“Invest at the point of maximum pessimism.”
“If you want to have a better performance than the crowd, you must do things differently from the crowd.”
“When asked about living and working in the Bahamas during his management of the Templeton Group, Templeton replied, “I’ve found my results for investment clients were far better here than when I had my office in 30 Rockefeller Plaza. When you’re in Manhattan, it’s much more difficult to go opposite the crowd.”
Investment Style
One of the past century’s top contrarians, it is said about John Templeton that “he bought low during the Depression, sold high during the internet boom and made more than a few good calls in between.”
His investing style can be summed up as looking for value investments, what he called “bargain hunting,”by searching out such targets in many countries instead of just one. Templeton’s investing mantra was “search for companies around the world that offered low prices and an excellent long-term outlook.”
As a value-contrarian investor, Templeton believed that the best bargains were in stocks that were completely neglected - those that other investors were not even studying. In this regard, he had an advantage not readily available to the average individual investor – his residence in Lyford Cay in the Bahamas. The Lyford Key Club was populated with successful businessmen from all parts of the world.
Templeton found he could easily exchange ideas and opinions with them in that attractive ambiance, which, for him, worked better than networking with Wall Street contacts with limited information who were always trying to sell him things. Not unlike fellow legendary investor Phillip Fisher, Templeton systematically mined his numerous contacts for valuable, objective investment data, which in his case related to market conditions and investment targets around the world.
Quotes
“One dollar invested with me in 1967 would have been worth $481 on the day I closed the firm in 1995, versus $19 if it had been invested in a Standard & Poor’s index fund.”
“I always used fundamentals. But the fact is that often, the time frame of my investments was short-term.”
“I do an enormous amount of trading, not necessarily just for profit, but also because it opens up other opportunities. I get a chance to smell a lot of things. Trading is a catalyst.”
“Somehow, in a business [securities trading] so ephemeral, the notion of going home each day, for as many days as possible, having made a profit – that’s what was so satisfying to me.”
Investment Style
Steinhardt had a long-term investor’s perspective but, for the most part, invested as a short-term strategic trader. He bet on directional moves using an eclectic mix of securities and was backed up by a team of traders and analysts. As mentioned above, he emphasized macro asset allocation type moves from which he harvested his gains. Charles Kirk, publisher of The Kirk Report, gleaned these “rules of investing” from a Steinhardt speech back in June, 2004, which show that even a high-flying hedge fund investor needs to be grounded:
Make all your mistakes early in life. The more tough lessons early on, the fewererrors you make later.
Always make your living doing something you enjoy.
Be intellectually competitive. The key to research is to assimilate as much data aspossible in order to be to the first to sense a major change.
Make good decisions even with incomplete information. You will never have all the information you need. What matters is what you do with the information you have.
Always trust your intuition, which resembles a hidden supercomputer in the mind. It can help you do the right thing at the right time if you give it a chance.
Don’t make small investments. If you’re going to put money at risk, make sure the reward is high enough to justify the time and effort you put into the investment decision.
Quotes
“It’s not whether you’re right or wrong that’s important, but how much money you make when you’re right and how much you lose when you’re wrong.”
“I rely a great deal on animal instincts.”
“Playing by the rules, one does the best he can, irrespective of the social consequences. Whereas in making the rules, people ought to be concerned with the social consequences and not with their personal interests.”
Investment Style
George Soros was a master at translating broad-brush economic trends into highly leveraged, killer plays in bonds and currencies. As an investor, Soros was a short-term speculator, making huge bets on the directions of financial markets. He believed that financial markets can best be described as chaotic. The prices of securities and currencies depend on human beings, or the traders - both professional and non-professional - who buy and sell these assets. These persons often act out based on emotion, rather than logical considerations. (For more insight, see Understanding Investor Behavior.)
He also believed that market participants influenced one another and moved in herds. He said that most of the time he moved with the herd, but always watched for an opportunity to get out in front and “make a killing.” How could he tell when the time was right? Soros has said that he would have an instinctive physical reaction about when to buy and sell, making is strategy a difficult model to emulate.
When he fully retired in 2000, he had spent almost 20 years speculating with billions of other people’s money, making him - and them - very wealthy through his highly successful Quantum Fund. He made some mistakes along the way, but his net results made him one of the world’s wealthiest investors in history.
Quotes
“Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market.”
Highlighting what Slater thought was the inherent greater potential for the growth of smaller companies, he said, “I once compared a very large company with an elephant by making the comment that elephants don’t gallop.”
“You get out of an investment what you put into it, so the first decision you have to make is how much time you are prepared to devote to the initial task of acquiring a basic knowledge of investment.
Investment Style
The stock picking strategy that Slater employed developed from the columns he wrote under the pseudonym “Capitalist” in London’s Sunday Telegraph, and which subsequently formed the basis for his “Zulu Principle” of investing. Slater’s favored type of investment was the small growth company that was undervalued by the market - a so-called hidden gem. At the core of his methodology is his focus on finding small growth stocks before they hit the big time.
The main tool, which Slater invented and popularized to find this type of stock, was his pioneering price-earnings to growth ratio, or PEG. This equation combines growth and value investing. The formula compares a company’s price-earnings ratio with its expected, or estimated, earnings per share growth rate.
Slater realized that a P/E ratio didn’t mean that a stock was expensive as long as its earnings growth was high. For example, if company’s stock was at a relatively high P/E of 30, but its earnings were expected to grow at a rate of 30%, it would have a PEG of 1, which is generally considered a very favorable value relationship. Slater pioneered the use of the PEG ratio, which today is widely used in investment analysis.