One practical way to go about learning how to invest money is by studying the best investors of the last century. There is usually at least one bit of investing wisdom to learn from each of the most successful investors.
While successful investors often share some traits, there is usually something unique about each investor. This post highlights some of the best investors and how they went about generating market beating returns.
- Warren Buffett
- Benjamin Graham
- Allan Gray
- Sir John Templeton
- George Soros
- Carl Icahn
- Peter Lynch
- Ray Dalio
- Michael Steinhardt
Warren Buffett is widely considered as the greatest investor ever. Indeed, he is the wealthiest investor, but that has as much to do with the length of his investing career as the investment returns, he has generated. Buffett is widely celebrated as a value investor and indeed he does invest in companies when he believes they are cheap enough to offer a margin of safety. But there is actually a lot more to his success. His goal is not to buy undervalued companies and then sell them when they are fully valued.
Most of his best investments have been companies that steadily compounded earnings for long periods of time. Buffett has a very long-term approach and will often accumulate cash for years at a time without making an investment. But when a stock market crash occurs, he will be happy to spend billions if he believes stocks are undervalued. Buffett doesn’t specifically focus on dividend investing, but many of his early investments have resulted in exceptionally large dividend flows today. This illustrates the effect of compounding over long periods of time. There is also a lot more to Berkshire Hathaway than value investing.
Berkshire is at its core an insurance business, and this business generates cash flow. The cash is then invested in listed companies and in unlisted subsidiary businesses. Buffet’s widely overlooked skill is the way he allocates the cash generated by the insurance business. Between 1965 and 2006, the book value of Berkshire Hathaway, the company he manages, increased 21.4% a year. However, since 2006 the book value has grown just 10% a year. Over that period an S&P 500 index fund or ETF would have given you a 12% return. So, he has actually underperformed recently. Despite recent underperformance, it’s probably fair to say that Buffett remains one of the best Investors of all time.
Benjamin Graham is best known as the “father of value investing”, as Warren Buffett’s mentor, and the author of two famous investing books. However, his investment firm also posted very impressive annual returns. Between 1936 and 1956, Graham’s firm earned annualized returns of close to 20%, while the market returned just 12.2%. When looking for good investments Graham ignored revenue and earnings forecasts. Instead he conducted fundamental analysis of company balance sheets and income statements.
Graham’s philosophy came down to only investing in a security that he believed was worth substantially more than he had to pay for it. Furthermore, he preferred companies with strong balance sheets and margins, little or no debt and sufficient cash flows. While his investment returns were impressive, his legacy will probably remain the influence he has had on many of the best Investors since his time.
Despite being one of the world’s best investors and money managers, Allan Gray and his investment company have received little attention. Gray started Allan Gray Investment Management in South Africa in 1973. In 1989 he moved to London and then to Bermuda and started Orbis Investment Management. His South African company continued to post impressive returns, though he was not involved in day to day money management.
At Orbis, Gray’s flagship fund was the Orbis Global Equity Fund. Between 1989 and 2019, when Allan Gray died, the fund returned 11.3% per annum. This compares to 7.3% for the FTSE world index and 5.8% for the average global equity fund. This return has made it the top performing global equity fund over most periods.
Orbis follows a value investing, and often contrarian approach to investing in stocks. The company employs a large team of analysts around the world to research investment ideas. Stocks are selected using an entirely “bottom up” approach. This means index weights; sector performance and economic factors are largely ignored.
Sir John Templeton
Sir John Templeton was another top performing value investor with a similar approach to Warren Buffett and Allan Gray. However, Templeton was more inclined than others to invest in new industries and to look at the growth potential of a company. Templeton, who began investing during the depths of the great depression in the early 1930s, was also a pioneer of the mutual fund industry.
It is believed that he made his first fortune by buying beaten down stocks during the Second World War. Throughout his career he made his biggest investments during periods of extreme pessimism. In 1954, he launched the Templeton Growth Fund which went on to return over 15% per year over the next 38 years. Templeton also launched some of the world’s first sector and industry specific funds. Among these were funds that invested in nuclear energy producers, and chemical and electronics manufacturers.
Templeton was an early investor in Japan. He began buying Japanese equities in the 1960s and sold them during the bubble that formed there in the 1980s. In 1992, Templeton sold his business to the Franklin Group and retired to focus on other interest. Franklin Templeton remains one of the largest mutual fund companies in the world and is notable for its global and emerging market funds.
George Soros was one of the first hedge fund managers to become a household name. Soros is now 90 and concentrates on philanthropy. However, he is still involved in the market, and his firm, Soros Fund Management, which is now a family office, is still operational.
The period of his career that made George Soros famous (and rich) was between 1969 and the mid-1990s. During this period, his Quantum Fund’s returns averaged 30% a year, with triple digit returns in two years. Soros really made a name for himself in 1992 when he made a large bet against the UK Pound, believing that the Bank of England would have to devalue the currency. It is believed that he made over $1 billion on that single trade.
Soros is more of a trader than an investor. His unique skill is understanding the relationship between the global economy, currencies, and asset prices around the world. He has traded most asset classes and is not afraid of market timing, short selling, and hedging – tactics that many of the best investors struggle with. He makes very large trades when he has high conviction and trusts his instincts when it comes to exiting positions.
His book the alchemy of finance explains his own take on behavioral finance known as “reflexivity”. The theory is that investor beliefs and biases create feedback loops which in turn shape the future. He combines thorough research to determine the fair value of assets with an understanding of expectations and the role emotions play in the price of assets. His original approach might today be best described as tactical asset allocation.
Carl Icahn’s exceptionally long and successful career in the financial markets has had several distinct phases. At various times he has been a risk arbitrager, an options trader, a corporate raider, an asset stripper, and an activist investor. In the 1960s he started a securities firm which focused on arbitrage opportunities. By 1978 he had built up enough capital to take controlling stakes in troubled companies.
During the 1980’s – the era of hostile takeovers and leveraged buyouts – he developed notoriety as a corporate raider. On many occasions once he had acquired a company, he would break it up and sell off the assets. He has since concentrated on activist investing via two hedge funds and a private equity fund. Icahn sees any stocks that other investors don’t want to own as potential investment opportunities.
His objective when investing money in a company is to own enough stock to become influential. He then tries to get over 50% of shareholders to side with him as he pushes for changes in the company’s strategy. Icahn typically sells his stake as soon as the stock is back in favor. Icahn’s track record is difficult to measure. Over the years his approach has changed, and so have investment vehicles through which he operates. However, he has managed to amass a $14 billion fortune without a large amount of outside money. This alone should rank him among the world’s best Investors.
Most of the world’s best investors take a very long time to gain recognition. Peter Lynch did it over a 13-year period when he was the portfolio manager of the Magellan Mutual Fund at Fidelity Investments. Between 1977 and 1990 the fund earned investors 29% a year and outperformed the S&P 500 in 11 out of the 13 years. During that period, the index averaged 15.8%. Lynch laid out his ideas on investing in his book, “One up on Wall Street”, which remains one of the best-selling investment books.
He also coined the term multibagger stocks to describe stocks that can return multiples of an initial investment. When it came to stock picking, Lynch preferred to invest in companies he knew and understood. His bias was towards growth stocks, but he also adapted his approach to suit the phase the market was in at each point in time. So, his methodology shifted from growth to dividends, turnaround situations and even value investing when there was a major crash. Lynch retired in 1990 at the age of 46. Although his career was relatively short, the success of both his fund and his book have meant he is widely recognized as one of the greatest investors of the last 50 years.
Ray Dalio is the recently retired founder of Bridgewater Associates, the world’s largest hedge fund management firm. As of 2019 the firm managed $138 billion across three investment funds. Although Dalio started Bridgewater in 1975, the firm’s initial focus was on consulting to corporates and governments on currency and interest rate risks. In 1991 the first hedge fund, the Pure Alpha fund was launched. Bridgewater’s success and growth as a hedge fund manager only really took off in the early 2000s.
Central to Dalio’s investment strategy is the idea of risk parity. This is basically a complex approach to diversification and asset allocation. Portfolios are constructed to protect capital regardless of the direction of inflation, interest rates, economic growth, and the stock market’s primary trend. In practice Bridgewater’s portfolio holds large ETF positions for stock market exposure, and various other instruments including options and bonds. In this way portfolio risk and volatility are reduced.
Dalio also developed a systematic approach to fundamental investing. Ideas and decisions are rigorously debated, and analyst’s forecasts are tracked over time. Decision making also follows a set of rules and principles – some of which are coded into analytical software. Between 1991 and 2011, Bridgewater’s Pure Alpha fund returned around 13% a year. However, the fund has struggled since then, with average returns of less than 3% a year.
Michael Steinhardt is another investor who is not very well known but racked up an enviable track record. His hedge fund business, Steinhardt Partners, ran from 1967 to 1995 and earned its clients 24.5% a year – after fees. In 1995 Steinhardt returned all the capital in the fund to investors and retired. In 2006 he came out of retirement to become chairman of Wisdom Tree Investments, a “smart beta” ETF issuer.
When he was managing money, Steinhardt was not only a hedge fund pioneer, but one of the first investors to embrace “global macro” strategies. Put simply, global macro traders find ways to profit from major trends in global markets. This entails long and short positions in all liquid asset classes. Steinhardt traded equities, bonds, commodities, and currencies. He looked for contrarian ideas and trusted his intuition rather than models or traditional analysis.
One of the reasons for Steinhardt’s strong average returns was that he was a master of short selling. This enabled him to generate positive returns in the 1973 to 1974 bear market. He did however admit that short selling is exceedingly difficult. Most of the hedge funds that have followed global macro strategies in recent decades have struggled to outperform. However, Steinhardt proved that it is possible, and just how profitable it can be.
Conclusion – Best investors of all time
When trying to reach your financial goals, it’s worth considering how successful investors managed to beat the market. All the investors in this list developed their own unique approaches to investing. Many of the best investors over long periods of time have been extremely patient value investors.
But it’s worth noting that some investors have adopted a much more active approach. Neither approach is right or wrong – but both need some sort of unique edge to be successful. In future, it’s very likely that the best investors will be those that leverage technologies like A.I. and big data to develop that unique edge.