How much can you learn from following legendary stock market investors?
There are a few individuals who have consistently beaten the markets. Names that spring instantly to mind are Warren Buffet, George Soros, Jim Slater and Sir John Templeton.
It certainly makes sense to learn from them, after all they've successfully navigated the treacherous waters of investment for decades to become rich. But you'd better be careful how you go about it.
If you're short of time it may be very tempting to copy the stock picks of some such star. However, there are reasons why this often isn't practicable (in the case of Sir John, he died in July 2008!). For example, it isn't easy to obtain accurate and timely information on all their most recent investments. What you tend to hear about are a few of them, quite long after they've been made. They may also be excessively risky or perform poorly.
When they do get it wrong, stars are far less likely than you to suffer calamitous losses because of the tools at their disposal, their hedging strategies, market contacts and their spread of investments across sectors and asset classes. Recently Buffet admitted to potentially losing a few billion dollars by buying ConocoPhillips at too high a price. However, that is loose change to him.
Which stars to follow?
It is particularly dangerous to follow 'new' stars that don't yet have a long track record of success, or whose success is just related to one sector, as their achievements may be due mainly to cyclical factors.
Following any star's stock picks without an understanding of their investment strategy is like copying the Buddha and hoping to find enlightenment without understanding the philosophy behind his actions: it is doomed to failure.
Personally, I think you can learn a lot from reading the books of 'star' investors to help formulate your own strategy based around your appetite for risk and personal financial circumstances. Use them as teachers and choose which one suits your particular style.
Warren Buffet
If I had to pick just two, I'd recommend that you read some of the works of Jim Slater and Warren Buffet. I like Buffet because he is very down to earth and appears to know his limitations, unlike most of us who tend to get carried away when things are going our way. Known as the 'Sage of Omaha' his annual letters to shareholders of his investment vehicle, Berkshire Hathaway, are a witty and very readable explanation of his investment strategy.
In the past Buffet has recommended that the most sensible thing that the average person can do if they have some spare cash is put it towards paying off the mortgage. I'd agree with that advice. Still, once the mortgage is paid off, it makes sense to look at the strategy and technique of successful investors and profit from them.
Buffet generally has a long term hold approach, buying reputable companies with good competitive positions. During the dotcom boom for example, he didn't get carried away with trying to second guess technology trends -- which was a very fast way to make but, more often, lose money.
Jim Slater
Jim Slater is much more of a risk taker and has tended to concentrate on small cap stocks that are likely to grow quickly. Indeed, he is credited with inventing the price-earnings to earnings-growth ratio (PEG) so beloved of Fools everywhere. His most famous books are the "Zulu Principle" and "Beyond the Zulu Principle".
Slater pointed out that 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.
I generally agree with this analysis, although in a downturn even large caps can fall out of favour.
Research
Even following a star in this way doesn't eradicate the need for further research as even gaining a simple understanding of a star's approach takes time and effort.
Moreover, it is important to be a little wary of investment systems as they don't always work and can be difficult to apply in practice. Adopt a common sense approach to refine them. For example, while a low PEG ratio may indicate that an AIM-listed share is a good prospect, such companies often experience cash flow problems so you need to examine this aspect of their business.
Most stars have adapted and created systems to suit their own investing styles and interests. If you do the same and take time to learn from them they can guide you to success.
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