Successful Investors

There are millions of books out there to get you started on your investing journey, but where do you start and who do you believe? Many people start with successful investors and academics which have influence finance theory. These books might be a bit dense for the beginner, but this section provides a brief summary of who the most influential investors are and how they have got to the top.

Warren Buffett
Most famous for being the second richest man in the world with a lazy USD55billion, Warren Buffett’s investment philosophy is centred around value investing. He would buy companies if their intrinsic value was far above the current market price. Theory goes that the underpricing by the market would be corrected over time, as markets are efficient. He also believed that the economics behind the company had to be solid.

The below are a summary of questions to ask, which will determine what business to buy, based on the book Buffettology by Mary Buffett, who is a former daughter in law of Warren’s:

• Is the company in an industry of good economics, i.e., not an industry competing on price points. Does the company have a consumer monopoly or brand name that commands loyalty? Can any company with an abundance of resources compete successfully with the company?
• Are the Owner Earnings on an upward trend with good and consistent margins?
• Is the debt-to-equity ratio low or is the earnings-to-debt ratio high, i.e. can the company repay debt even in years when earnings are lower than average?
• Does the company have high and consistent Returns on Invested Capital (his version differs from the popular definition)?
• Does the company retain earnings for growth?
• The business should not have high maintenance cost of operations, low capital expenditure or investment cash outflow. This is not the same as investing to expand capacity.
• Does the company reinvest earnings in good business opportunities? Does management have a good track record of profiting from these investments?
• Is the company free to adjust prices for inflation?

Interestingly, he has repeatedly criticised the financial industry for what he considers to be a proliferation of advisors who add no value but are compensated based on the volume of business transactions which they facilitate. He has pointed to the growing volume of stock trades as evidence that an ever-greater proportion of investors' gains are going to brokers and other middle-men.

Benjamin Graham
Known as the father of value investing, Graham taught Warren Buffett at the Columbia Business school. Graham explored the ideas of speculation and investment and published a booked called Securities Analysis in 1934 which is regarded as the best book on value investing. He stated that investors should look at the underlying business before buying and that it was numbers that mattered. He also believed that market fluctuations in share prices should be ignored because this only reflected if someone was willing to sell a part in a business at a particular price (this is called the parable of Mr Market).

His famous theory on the margin of safety which states that investors should only buy shares in companies where there was a sufficient discount to what they had calculated as the company’s value. This is a basic concept of value investing.

Graham also wrote a booked called The Intelligent Investor in 1949, which billionaire Warren Buffett describes as "by far the best book on investing ever written". This is echoed by other leading investors such as Irving Kahn and Walter Schloss.

George Soros
Legendary for his currency speculation, Soros is a financial speculator, stock investor and philanthropist. Soros began his career as an arbitrage trader, which simply means finding the same good sold at different prices and trading it for no risk involved.. Where securities are traded on more than one exchange, arbitrage occurs by simultaneously buying in one and selling on the other.

Soros is the founder of Soros Fund Management LLC which is a fund manager, with various investment strategies for various funds including some controversial hedge funds such as the Quantum Group of Funds. The investment strategies have been based on analysis of real or perceived macroeconomic trends in various countries. Soros’ companies have been accused of applying pressure on currencies to directly benefit their speculative strategies. Soros claims that his funds take advantage of known weaknesses in the international financial system.

He is best known for his one transaction which made him $1.1 billion profit, which involved speculating on the British Pound.

Peter Lynch
Started in equity research at Fidelity Investments in 1966, he soon graduated to be director of research and in 1977, he was put in charge of the Magellan Fund (a mutual fund which is a form of collective investment that pools money from many investors and invests their money in stocks, bonds, short-term money market instruments, and/or other securities). The fund is famous for returns of 28% (annualised) and growth in the size of assets from $18 million in 1977 to $14 billion in 1990.

Lynch is famous for coining terms such as “invest in what you know” and “local knowledge”. He suggests that this is a good starting place for a beginner to invest, as most people do not have time to learn about complicated quantitative stock measures or read lengthy financial reports. It is easier to become a specialist in certain industries, in which you already have knowledge. In the books he has written about investments, he writes about some of the successful investments he’s made come from when he was out with his family or driving to the local shopping centre.

He wrote a book called Learn to Earn, which is aimed at teenagers which may be a good introductory read.