When learning a skill like cooking or painting, it can be useful to understand the habits and philosophies of the most successful practitioners. Investing is also a skill you can hone, and studying the masters of investing can, quite literally, yield great dividends.
Though all investors share the goal of making a profit, they use different strategies and tactics. Reviewing the proven and effective strategies of titans like Benjamin Graham, Warren Buffett, Peter Lynch, and John Bogle can remind you that many paths can lead to the same end point, and that the right path for you may depend on where you're starting from.
Here are strategies of and tips from some of the world's most famous investors.
Graham literally wrote the book on value investing — two of them, in fact: "Security Analysis" (1934) and "The Intelligent Investor" (1949). Alongside co-managing the Graham-Newman partnership with Jerry Newman, Graham taught an investing class at Columbia Business School for 28 years.
Perhaps his biggest claim to fame is the tremendous impact he had on one of his students, famed investor Warren Buffett. The Oracle of Omaha discovered "The Intelligent Investor" in 1949 as a 19-year-old and has since said many times, "Picking up that book was one of the luckiest moments of my life." Buffett says he attended Columbia Business School expressly to study with Graham.
Graham popularized "value investing," a method of finding undervalued investments that may present a bargain. The key to successful investing, Graham wrote in "The Intelligent Investor," is to avoid falling slavishly for "Mr. Market," his term for the groupthink that drives market behavior. "Mr. Market lets his enthusiasm or fears run away with him," wrote Graham.
Rather than making impulsive decisions based on "Mr. Market's daily communication" — in other words, buying and selling based on short-term price fluctuations — Graham advised, "You will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position."
Graham's investment strategies might work for you if:
- You like to stay the course even when the going gets rough
- You pride yourself on keeping a cool head when others are panicking
- You make your own judgments rather than listening to friends or basing investing decisions on the day's news
Warren Buffett, with a net worth of around $79.3 billion, is the world's seventh-richest man and one of the most emulated and admired living investors. He famously filed his first tax return at age 14, declaring the $364 of income earned from his paper delivery route.
When he was a bit older, Buffett studied at the Wharton School of Business, the University of Nebraska, and then Columbia Business School, where he learned from Graham. He went on to work for Graham's investment partnership, Graham-Newman. Upon Graham's retirement, Buffett started several partnerships of his own and began a career of buying and selling shares of companies.
In 1962, he started buying shares of a struggling textile firm called Berkshire Hathaway. Buffett shed the company's textile ties long ago to become the investment giant it is today, and the company is now worth around $500 billion.
Buffett's investing style closely follows that of his mentor Graham: Find a good but undervalued investment and buy it on "sale." One notable difference between the two is that Graham invested in stocks, whereas Buffett has been known to buy entire companies.
And Buffett has at times diverged from Graham's brand of value investing. For example, Berkshire Hathaway eschewed tech stocks for most of its history, which makes sense for a value investor since the tech industry is prone to bubbles. But in 2016, Berkshire Hathaway reported that it had taken a $1 billion stake in Apple, even though it would be hard to call Apple an undervalued stock. Based on Berkshire's most recent SEC filing from August 2020, its stake in Apple is $80 billion. He explained his love affair with Apple on CNBC in February 2020: "I don't think of Apple as a stock. I think of it as our third business," after the insurance and railroad businesses.
Would Graham have approved? Maybe not. As Cathy Seifert, a Berkshire analyst at CFRA Research, told CNBC in July 2020: "Had [Buffett] stuck to his guns and only bought value stocks, that portfolio would not have done as well."
Video by David Fang
The often-quoted Buffett has produced several famous aphorisms, including, "Rule number one of investing: Don't lose money. Rule number two of investing: Don't forget number one." He has always stuck to the value investing principles instilled by Graham, and he advises choosing an array of stocks based on long-term value. "Nobody buys a farm based on whether they think it's going to rain next year," he said on "Squawk Box" in 2018. "They buy it because they think it's a good investment over 10 or 20 years."
There is at least one area, though, where Buffett does make instant decisions based on short-term market movements: his breakfast. In the 2017 HBO documentary "Becoming Warren Buffett," the Oracle of Omaha revealed that he goes to the McDonald's drive-through for breakfast and bases his order on the latest market figures.
Buffett's investment strategies might work for you if:
- You are a buy-and-hold investor, meaning, you like to buy stocks or other financial products for the long term
- You value capital preservation (keeping the money you invested) more than the excitement of seeing your investments go up and down
- You are naturally very patient
Lynch was a legendary mutual fund manager. While running the Magellan Fund for Fidelity Investments from 1977 to 1990, he increased the fund's assets under management from $18 million to $14 billion, averaging a 29% annual return.
Like Buffett, Lynch started his first job at an early age. In his case, he got hired to be a golf caddy. Also like Buffett, he studied at Wharton. But this might be where the two investors' similarities end.
Lynch says that only your gut can tell you how much bad news you can put up with. "In the stock market, the most important organ is the stomach. It's not the brain," he said in an interview published on Fidelity's site. "On the way to work, the amount of bad news you could hear is almost infinite now. So the question is: Can you take that? Do you really have faith that 10 years, 20 years, 30 years from now, common stocks are the place to be. If you believe in that, you should have some money in equity funds."
Lynch is famous for advocating an "invest in what you know" philosophy. In his investing book "One Up on Wall Street," he explains that one of his highly successful investment ideas didn't come from studying spreadsheets — it came from his wife Carolyn, who noted that many grocery stores had an eye-catching display for L'eggs brand pantyhose, manufactured by Hanes. The brand's gimmick was that the products were sold in plastic egg-shaped containers. After hearing her rave about L'eggs enough times, Lynch added Hanes stock to the Fidelity fund he managed.
This is not to say that Lynch believes homework isn't important. On the contrary, he strongly advises doing your research. "Look for small companies that are already profitable and have proven that their concept can be replicated," he wrote in "One Up on Wall Street."
Lynch's investment strategies might be right for you if:
- You are able to view your investments in the stock market as more like a game
- You like being creative with investment ideas
- You trust your gut more than you trust the experts
Bogle's Vanguard Group, one of the world's largest mutual fund companies, started the first index fund in 1976: the First Index Investment Trust, later named the Vanguard 500 Index Fund. The fund's size totals some $597 billion, and Vanguard as a whole has about $6.3 trillion under management. One of Bogle's most oft-cited quotations is, "Owning the stock market over the long term is a winner's game, but attempting to beat the market is a loser's game."
An index fund is a fund that tracks the performance of a stock index. The Vanguard 500, for example, tracks the S&P 500. Other funds might track the Nasdaq Composite, the Dow, or other similar indexes.
Index funds are considered among the safer investments, because their holdings are in companies with the highest market capitalization (meaning, highest total value). It's another way of investing in blue-chip stocks.
Video by Courtney Stith
It might seem like an obvious way to go about investing, but Bogle's idea of a "passively" managed fund was revolutionary at the time. Most funds were actively managed and could charge around 2% in fees; Vanguard was able to pass on the savings of a low-maintenance fund by lowering management fees.
Buffett has been a proponent of index funds for years. Seeing the fruits of index funds may require patience, which is a virtue often touted by investors like Buffett and Bogle. As Bogle told Grow in 2016, "There's no pot of gold. And there's no rainbow. If you can just avoid stupid mistakes, you'll do very well."
John Bogle's investing strategies might be right for you if:
- Financial security during retirement is a priority for you
- You don't enjoy watching the stock market
- You trust that blue-chip companies are the best investments and have no interest in the next new thing
Though these four investing titans have different approaches, you can see common threads running through their philosophies: Patience is key, studying companies matters, and don't get jumpy when the markets do.
More from Grow: