Lessons From Five Famous Investors
In this article, we will examine five successful and famous investors in the world, see how they achieved their success and explore what lessons we can learn from their careers and apply to our own.
Five Famous Investors and Their Lessons
Whether you are a novice trader or a seasoned professional, you should always be willing and eager to learn as much as possible about investing and the financial markets. And who better to learn from than some of the most famous investors in the world?
The investors we are going to look at have all applied their strategies and philosophies to great effect, making a fortune for both themselves and others. There is an awful lot we can learn from their success, so without further ado, let’s get started!
“The intelligent investor is a realist who sells to optimists and buys from pessimists.” - Benjamin Graham
The first entry on our list of famous investors, Benjamin Graham, is considered by many as the father of value investing. Graham was born in London in 1894 and taught at Columbia Business School during the Great Depression. In 1949, he wrote the book The Intelligent Investor which is still in print and considered an important piece of literature to many in the investment world.
Graham drew a strict distinction between speculation and investing and was a proponent of the belief that the price of a share is not necessarily the same as the value of a share. This is the central tenet of value investing, in which underpriced shares are sought on the market.
He believed strongly in scrutinising the fundamentals of a company in order to gauge its real value, as opposed to paying attention to the whims of the market. Furthermore, instead of looking for slightly underpriced stocks he argued that you should instead seek shares which are hugely underpriced, giving yourself a wide ‘margin of safety’.
Between the years of 1936 - 1956 Graham achieved an average annual return of around 20%. His greatest success was the acquisition of a 50% stake in the Government Employees Insurance Company (GEICO) for $712,000 through his Graham-Newman Partnership in 1948. By 1972 this position was worth $400 million.
What Can We Learn From Benjamin Graham
Graham’s whole philosophy revolves around the importance of good fundamental research and investing based solely on this research and not on sentiment within the market.
Although this view may be controversial to those who follow different schools of market ideology, there is still something everyone can take away from it. Regardless of your methodology, research and hard work are crucial when deciding where to invest your capital.
Benjamin Graham’s philosophy and approach to investing spawned many other great investors who followed in his footsteps. During his time at Columbia University, he taught, inspired and later employed the next person on our list of famous investors.
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“It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price.” - Warren Buffet
Widely regarded as the most successful investor of all time, as of December 2020, the ‘Oracle of Omaha’, as he is sometimes known, has a net worth of over $85 billion, making him the fourth wealthiest person in the world.
Like Graham before him, Warren Buffett examines a company’s intrinsic value rather than paying particular attention to what the market says about it. Before investing in a company he scrutinises its fundamentals, establishes whether the company is good at generating earnings and thus establishes if it is underpriced.
In 1962, Buffett began buying stock in a textile company called Berkshire Hathaway and in 1964 aggressively increased his position, taking control of the business. He soon expanded the company into insurance and other investments and today Berkshire Hathaway owns many companies in their entirety, including GEICO, as well as significant minority holdings in other public companies, including Kraft Heinz Company (26.7%), American Express (17.6%), the Coca-Cola Company (9.32%) and Bank of America (11.65%).
Since 1965, Berkshire Hathaway has averaged an annual growth in book value of 19% and as of 21 January 2021, its Class A shares, which have never been split, are worth $354,000 each.
Depicted: Admiral Markets MetaTrader 5 - Berkshire Hathaway Inc. (Class B) Daily Chart. Date Range: 10 September 2018 - 25 January 2021. Date Captured: 26 January 2021. Past performance is not necessarily an indication of future performance.
One of Buffett’s many famous quotes is “be fearful when others are greedy, and greedy when others are fearful.” This illustrates two aspects of his philosophy.
First, he is on the lookout for opportunities provided to him by market mood. For example, in the wake of the 2008 financial crisis, when most investors were stampeding out of the market, Buffett pounced and quickly bought significant stakes in high quality companies like Goldman Sachs, Bank of America, Mars and Dow Chemicals. He is reputed to have made more than $10bn just from the investments he made during that time.
Second, Buffett does his own analysis, comes to his own conclusion and is not afraid to put his money behind this conclusion - even when everyone else is heading in the opposite direction. In other words, he is not afraid to be a contrarian investor.
What Can We Learn From Warren Buffett
Similar lessons can be drawn from Buffett as Graham, with both highly valuing exhaustive research before any investment.
Furthermore, Buffett is famous for staying within his self-described “circle of competence”. In other words, he sticks to what he knows and does not invest in companies which he does not understand well, having once quipped: “Risk comes from not knowing what you're doing”.
This is definitely very sage advice. The financial markets are complex and before investing your money into anything, you should do your research and ensure that you fully comprehend the risks involved.
“I’m only rich because I know when I’m wrong” - George Soros
The next on our list of famous investors, is another name which is likely to be familiar to most, the legendary hedge fund manager George Soros. As of May 2020, Soros had a net worth of $8.3 billion, a number which does not accurately reflect his success considering that he has donated more than $32 billion to charitable causes.
In 1970, Soros founded Soros Fund Management, advising the Quantum Fund which achieved an average annual return of 30% between 1970 and 2000. To put that into context, over the same period, the S&P 500 had an average annual growth rate of around 14%.
Soros’ most famous moment came in September 1992. After recognising that the British pound was overvalued versus the German mark, Soros began building short positions in the British pound. By September 1992, Soros’ short position was $10 billion and on 17 September 1992, dubbed ‘Black Wednesday’, the pound fell 15% against the mark. Soros’ short position earned him an estimated $1 billion and the nickname “the man who broke the Bank of England”.
Whereas Warren Buffett’s analysis is driven by the fundamentals of individual companies, Soros’ approach is driven by ‘macro’ factors; by the performance of whole sectors or entire economies. As such, his investments tend to be made into currencies, commodities or bonds.
Furthermore, whereas traditional economists believe in “rational markets” and “fair” asset prices, Soros’ investment philosophy is based on something he named reflexivity.
He believes that (a) individual investments are made by fallible humans and that (b) every investment affects the psychology of other investors and entire markets.
Believing in reflexivity means believing that market prices frequently get too bullish or too bearish. Soros scans the markets for opportunities driven by reflexivity.
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What Can We Learn From George Soros?
There are three important lessons traders and investors can learn from Soros.
The first is the importance of macro analysis. The macro environment affects all companies operating in it, as well as currencies, commodities and bonds - and it can be easier to follow than honing in on individual instruments.
Second, investors sometimes behave like a herd, jumping into a popular trade and thus mispricing assets, which creates opportunities for savvy traders.
Third, Soros is not afraid of going long or going short in order to exploit the opportunities he sees. He has mastered both techniques.
“Some people get rich studying artificial intelligence. Me, I make my money studying natural stupidity” - Carl Icahn
Carl Icahn is what is known as an activist investor. In other words, he acquires shares in publicly held companies and then uses his ownership position to agitate for change within that company with the goal of increasing shareholder value. Icahn targets companies whose stock he believes are undervalued and which are being poorly managed.
To enable his activism, Icahn invests time to understand the business behind the share: what does this company produce, how is that priced, who buys it, how is it sold, etc. And, most importantly, can the company do these things better?
In 1985, he gained his reputation as a “corporate raider” following the hostile takeover of Trans World Airlines and its subsequent asset stripping to repay money which he borrowed to purchase the company.
In the years since he has taken substantial and sometimes controlling positions in individual companies. Over the years, these positions have included Texaco, Western Union, Apple, eBay, Dell, Motorola and Netflix, to name a few. He also founded and retains majority ownership of Icahn Enterprises, a publicly traded conglomerate which holds investments in various industries including auto parts, energy, real estate and metals.
Depicted: Admiral Markets MetaTrader 5 - Icahn Enterprises Daily Chart. Date Range: 4 September 2018 - 22 January 2021. Date Captured: 25 January 2021. Past performance is not necessarily an indication of future performance.
Nothing illustrates Icahn’s energy and stamina better than the fact that in 2016 he took a position in Apple and started a campaign to pressure them into distributing some of the billions in cash held by the company. At the time, Apple was widely admired as one of the most successful companies of all time - and Icahn was 81!
Such is Icahn’s reputation and reverence among other investors, that when he begins to buy shares in a company, it usually enjoys a rise in stock price, referred to on Wall Street as the “Icahn Lift”.
What Can We Learn From Carl Icahn?
There are some signature aspects of Icahn’s approach, like his legendary aggression, which would be of no use to the average investor.
However, there are two lessons that anyone can apply.
The first is to learn the business behind the share. The more you understand the business, the more quickly you will be able to react to the economic and industrial conditions that affect the shares positively or negatively.
The second lesson, which applies to other investors on this list, is to do your own thinking and not to be afraid to come to your own conclusions, even when they are different from everyone else’s.
“I don’t think you can consistently be a winning trader... You have to figure out how to make money from being right only 20 to 30 percent of the time.” - Bill Lipschutz
Somewhat of a legend among some in the Forex trading community, the last entrant on our list of famous investors is Bill Lipschutz. Although he does not have a net worth to rival the other members of our list, his story is an inspirational one and full of lessons for aspiring traders.
Lipschutz came from fairly modest beginnings and, whilst studying at University, was left $12,000 inheritance from his grandmother. Without any background in finance, he spent time researching trading and the financial markets and managed to turn this $12,000 into $250,000. However, he lost the entire $250,000 through one bad decision.
He continued trading and improved his capital position. Upon graduating from University, he joined Salomon Brothers as part of a training program and was soon asked to be a part of their newly formed Foreign Exchange Department. By 1985, Lipschutz was making an average of $300 million per year for the firm.
In 1995, Bill Lipschutz founded Heathersage Capital Management with former classmates, where he holds the position of Director of Portfolio Management. The firm focuses on the trading of G10 currencies and was recently named “Best Foreign Exchange Hedge Fund” at the Hedge Funds Review European Performance Awards 2020.
What Can We Learn From Bill Lipschutz?
The achievement of turning $12,000 into $250,000 as a novice trader is, in itself, remarkable and shows us that with hard work and determination it is possible to make money from a modest sum of capital on the financial markets.
Probably the most important lesson we can draw from our last famous investor is one of caution and the importance of risk management. A bad mistake cost Lipschutz all his capital. If you do not manage the risks well when trading, there is a good chance that you will end up giving away any profits that you might make.
One of the most important things when it comes to Forex trading, and trading in general, is capital preservation.
However, in the wake of Lipschutz’s enormous loss, we can also learn another lesson. Losing is a part of trading the financial markets. No trader, no matter how successful or famous they are, wins all of their trades all of the time. If you are going to be a successful investor or trader, you need to learn how to deal with the psychological aspect of losing money.
Lipschutz lost $250,000, a huge sum of money, right at the beginning of his career. He could have been forgiven for giving up on investing there and then, however, he was persistent and made a success of himself.
If you are an aspiring trader looking for inspiration, hopefully this article has provided some for you, as well as some important lessons to consider.
The five famous investors listed above all illustrate one important principle - they are constantly learning and looking for new information. If there is one thing that you take away from this article, it should be that success does not happen overnight. Every investor on this list achieved their success through hard work, practice and persistence.
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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.