Saturday, March 26, 2005

A Dozen Influences

When I sit down and think about the well-known investors whose investment styles I am attracted to, I come up with the following list:

"Classic" Group:

* Ben Graham: Although I do not subscribe to Graham's strict value investing principles, I pay close attention to fundamentals and "relative value" in my search for stocks and real estate properties. I particularly like Graham's "Mr. Market" analogy, describing how stock prices move based on investors' emotions. I also savor the great irony in Graham's uncharacteristic early-stage investment in a little insurance company (his partners wanted to make the investment and Graham reluctantly went along) that eventually became Geico, "incidentally" making Graham more money than all of his many years of "cigarette butt," bargain basement value stock investing combined!

* Warren Buffett: Buffett was Graham's student, who learned from the master and adopted a more growth-oriented value investing style, focussing on ROE and the intrinsic value of companies. Like Buffett, I invest for the long-term, rarely sell what I own, and prefer businesses with low leverage that have been in operation for many years, making their future performance more predictable. However, unlike Buffett, I am heavily invested in technology stocks, believing that this sector shows the best promise for high sales, earnings and cash flow growth. Also, I am at odds with Buffett's often quoted opinion that today's stock market is overpriced.

* Peter Lynch: As fund manager for Fidelity's Magellan Fund in the 1980s, Lynch became famous for his ability to find "ten-baggers" for his portfolio, often among little known companies that housewives and shoppers tend to find out about before Wall Street does. Always on the prowl for young companies that can become ten-baggers, I like Lynch's way of letting his common sense as a consumer guide him in his investment decisions. However, compared to Lynch who often bought whole sectors for the Magellan Fund, I generally want to do more due diligence on individual companies before deciding to invest, and I run a much more concentrated, single-stock portfolio.

* George Soros: Soros is the epitome of a trader, having the uncanny ability to reverse his thinking on a dime, going from long to short in an instant, largely based on his "intuition" of where the market is headed. My long-term, deliberate investing style is the polar opposite of Soros' short-term positioning and frequent reversals. However, I find similarities with his private, "small shop" orientation as an investor, an approach that he so successfully employed in growing his Quantum Fund in the 1970s and 1980s. I find that Soros' ideas on "reflexivity," describing how participants themselves influence the direction of the market, really add only very minimally to my understanding how markets work and how to invest.

* Donald Trump: During the 1970s, I once listened to a tape recording of Trump, telling real estate investors how vital it is to "protect the downside" by focussing on cash flow and avoiding high leverage. Over the ensuing 20 or 30 years, Trump has apparently not heeded to his own advice, since he has, by choice or not, found himself going in and out of bankruptcy. I find little beyond entertainment value in Trump's flamboyant side, preferring a much more low-key existence for myself. Nevertheless, I have taken Trump's "protect the downside" advice to heart--even though he apparently has not.

* Value Line: Not a person but a stock advisory service, Value Line is the single most useful investment service I read when researching companies to invest in. I like their independent, objective analysis and believe that their lack of affiliation with investment banks (sell side) and fund managers (buy side) adds credibility to their investment opinions.

"Modern" Group:

* Bill Miller: Miller is Legg Mason's star portfolio manager who has managed to beat the S&P 500 for 14 years straight. The other day I took a look at the Miller's Value Trust holdings and was surprised to find a great deal of overlap between his portfolio and my own. Among his top 10 holdings are Amazon and eBay and, despite the fund's gigantic size ($12 billion), Miller owns just 36 different stocks total. Miller is rumored to have picked up positions in the Chinese Internet stocks, Sina and NetEase, recently. Although I do not know much about Miller, I suspect that behind the man is an investment philosophy similar to my own: Think long-term and buy into companies that, almost without question, will be at least ten times as big ten years from now.

* Jim Rogers: Rogers was Soros' right-hand man during the heyday of the Quantum Fund. Rogers performed the analysis and Soros' did the trading, until they had their falling out. I like the Rogers that I read about in his book entitled Investment Biker, which takes him around the world on his motorcycle. He comes off as being a careful macro thinker who is willing to sit patiently on the sidelines until an opportunity too good to refuse (Buffett's "home run" pitch) comes along. Rogers has been bullish on China and commodities for a while. I buy into the long-term story on China. However, unlike Rogers, I favor stocks over commodities right now.

* Victor Niederhoffer: After a brief stint with Soros, Niederhoffer had success as a fund manager but soon lost it all on a leveraged bet on Thai banks during the 1990s. His bankruptcy led him to rethink his life and write a few books on investing. I like Niederhoffer's skepticism and numerical approach to debunking market myths. I take an occasional look at his "Daily Speculations" website but generally find that the topics there wander from the financial markets a little too far for my liking. It will be interesting to see how much of a comeback Niederhoffer can make following his humbling brush with insolvency a few years ago.

* Marc Faber: Faber is a non-numbers guy, preferring the qualitative Austrian school of economic thought for his analysis. He is one of the "outsider" Westerners who has become a well-respected expert on Asia, where he has lived for the extent of his career. He is also a "gold bug," believing that gold is bound to do well in our world replete with governments who mismanage their own currencies and economies. Although I do not agree with Faber on gold, I like his historical and global perspective. Faber is much more pessimistic (see his website: gloomboomdoom.com) than I am, but I feel he has some investment wisdom to share.

* Sam Zell: Zell is the "king" of REITs, being the founder of Equity Office, Equity Residential and Equity Lifestyle. He made his money in his early career by scooping up industrial properties in Texas at steeply discounted prices when nobody else was willing to buy into the market. Like many great investors, Zell appears to have a knack for identifying cheap assets and deploying capital at market bottoms. He is also an empire builder, as his REITs evidence. I favor Zell's style much more than Trump's.

* Motley Fool: The Motley Fool publishes more online columns about stocks and investing than any other news source I run across these days. I agree with the Fool's long-term investing approach, in which they advocate buying stock in companies with solid underlying businesses, largely following the approach of Graham, Buffett and Lynch. I find their commentary generally useful but would prefer that their analysis run consistently deeper than it usually does.

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