Michael Steinhardt

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Just as outright euphoria is often a sign of a market top, fear is, for sure, a sign of a market bottom. Time and time again, in every market cycle I have witnessed, the extremes of emotion always appear, even among experienced investors. When the world wants to buy only Treasury Bills, you can almost close your eyes and get long stocks.

The only analytic tool that mattered was an intellectually advantaged disparate view. This included knowing more and perceiving the situation better than others did. It was also critical to have a keen understanding of what the market expectations truly were. Thus, the process by which a disparate perception, when correct, became consensus would almost inevitably lead to meaningful profit.

Beginning at a very early age, I have made cumulatively more judgments, and more investments decisions based on the same kinds of data, than almost anyone else. This process unconsciously leads to a sharpening, a fine-tuning, that, over time, results in fewer mistakes. In this repetitious behavior, a learning occurs that is not consciously understandable but allows one to develop ‘good instincts’. Often listening to an idea led me to an entirely different conclusion to that envisaged by the proponent of that same idea, whose knowledge was far deeper than mine.

BORN New York, USA 1940.

EDUCATION In 1960 Steinhardt graduated from the Wharton School of Finance at the University of Pennsylvania in only three years.

CAREER Steinhardt began his career on Wall Street in research and analyst positions with mutual-fund company Calvin Bullock followed by a similar position at the brokerage firm at Loeb, Rhoades & Co, before founding Steinhardt, Fine, Berkowitz & Co., a hedge fund, in 1967. He retired and closed the fund in 1995. In 2004 he made a comeback through Wisdom Tree, which is the seventh largest index fund in the US based on ETF.

INVESTMENT PHILOSOPHY Even if the fundamentals were the starting-point, he usually ended up being a short-term investor with the normal holding being no longer than a month. ‘Our investment style is four yards up the middle in a cloud of dust’ as he himself described his investment style with the help of a metaphor from American football. He invested in all forms of assets, but stocks were usually in the majority. In the final years of the fund’s existence he also invested abroad, but with dreadful results. In contrast to the other traders in this book, Steinhardt was the opposite of a trend-follower. He preferred to go against the market and short his favorite companies. Neither did he care for technical analysis and graphs. Contrarian is probably the best description of his style, but in large part he was highly individual, and hard to copy. He had no rules or valuation frameworks, but tried simply to think differently. Steinhardt was known for his ability to predict the direction of the stock market. In his time, he was said to have been the most demanding boss on Wall Street.

OTHER He was one of the first prominent hedge-fund managers. No one has been so successful (over 30 % annual gross performance in 28 years) or had that stamina using such an intense investment strategy as Michael Steinhardt. One dollar invested in 1967 in his fund would have grown to $481 in 1995, compared to $19 for S&P 500 in the same period. Having in mind that Steinhardt on average only was roughly 35% net long in his portfolio over the time tells you how good he must have been on both picking winners and losers in the stockmarket. In 2001 he published his autobiography: No bull: my life in and out of the markets. Since retirement he has managed his own money and collected art. He is also a major philanthropist, active in Jewish causes.

Sources: Michael Steinhardt, No bull: my life in and out of markets (2001); Investopedia; Wikipedia.

Investment Checklists

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In many professions experts face a constant rise in complexity due to increased domain knowledge. The traditional way to handle this has been to specialize into an ever-smaller niche to increase skill and to be able to keep the expert status. Besides creating the undesirable second order effect that too few have the ability to overview and understand larger areas, this strategy...

Marc Faber

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Be very careful of any forecast. Usually, analysts, fund managers, and strategists can foresee the future only when it coincides with their own wishes, whereas they ignore the most obvious facts when these facts are not welcome.

Watch day and night (the latter very important) with curiosity what is happening around you because the greatest investment opportunities are always hidden in the most unlikely places.

We all need to remind ourselves that we have no idea how the world will look like in five years, let alone ten. Therefore, some of our business or investment decisions will be very wrong. But, what we need to focus upon is what the consequences could be, if we are wrong.

Investors mostly fail because they find it very hard to do nothing. But by spending a day in a round of strenuous idleness without your mobile phone and Blackberry, you may see the future more clearly. Remember, patience is also a form of action.

BORN Zurich, Switzerland 1946.

EDUCATION Faber studied economics at the University of Zurich and, at the age of 24, obtained a Ph.D. in Economics.

CAREER Between 1970 and 1978, Faber worked for the investment bank White Weld & Company Ltd. in New York, Zurich, and Hong Kong. Since 1973, he has lived in Hong Kong. From 1978 to February 1990, he was the managing director of Drexel Burnham Lambert (HK) Ltd. In June 1990, he set up his own business, Marc Faber Ltd., which acts as an investment advisor and fund manager. In addition, he publishes a widely read monthly investment newsletter The Gloom Boom & Doom Report, writes books, and is a regular contributor to several leading financial publications around the world.

INVESTMENT PHILOSOPHY Faber invests and advises all over the world in almost all asset classes. He relies on his command of economic history as well as his time as a trader. He focuses on macro, strategy and gold. For people in the investment community, he is maybe known as the most notorious bear in the market and at the same time a contrarian investor. The first is not always true. He has made several bullish calls, of which Brazil stocks in 1990s and world stock market in spring 2009 are the most remembered. The following cornerstones advice gives a sense of his investment philosophy: (i) Everything comes to the investor who buys out-of-favour and neglected assets. (ii) The best way to make money is to buy value stocks: low price to sales, low price to book, low price to cash flow, high dividend yield. (iii) Never forget to diversify properly. (iv) Never get carried away by a lucky investment with outsized gains. (v) Stay single! Even if he digs into specific stocks and sectors he spends most time on the macro level. He is keen on the Austrian School of economics.

OTHER He is well-known for being prescient about the 2008 financial crisis; the Asian crisis months before it happened; warning his clients to cash out before Black Monday in 1987; forecasting the burst in the Japanese bubble in 1990; correctly predicting the collapse in US gaming stocks in 1993; foreseeing the Asia-Pacific financial crisis of 1997/98; and so on. His mantra is ‘Follow the course opposite to custom and you will almost always be right’. His book Tomorrow’s Gold was for several weeks on Amazon’s best-seller list. The Gloom Boom & Doom Report uses economic, social, and historical trends to warn investors when investment themes have become widely accepted and are, therefore, highly priced and risky, while it continuously searches for opportunities in unloved and depressed markets. Gold is the asset where he has been most successful. His web site is illustrated with 17th century paintings of “The Dance of Death” and he is nicknamed Dr Doom. He has a collection of a quarter of a million Mao badges and has a ponytail.

Sources: Marc Faber; gloomboomdoom.com; Wikipedia.

Primer - The Cost of Capital

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In this text we investigate if today’s lower interest rates motivate higher equity valuation multiples. We in this try to understand a stock’s estimated fundamental value and not necessarily forecast its future short to mid-term market price. The answer to the above question is no, and the reason is that lower cost of capital is counterbalanced by adjustments in factors like...

Semiconductor Primer

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Semiconductors & Semiconductor Equipment is one of three industries that make up the Information Technology Sector, the others being Software & Services plus Technology Hardware & Equipment. As is evident by the name this industry contains two sub-industries: the larger Semiconductors and the smaller but important sub-suppliers within Semiconductor Equipment...

Jean-Marie Eveillard

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Value investing makes sense and it works – over time. Benjamin Graham’s book The Intelligent Investor and Warren Buffett’s letters to shareholders in Berkshire Hathaway’s annual report are not about complex mathematical models; they’re about common sense.

In 1984, Buffett showed that the returns – over time – of the value investors were much above average. In a 2004 update, the late Lou Lowenstein showed again that the returns over time of ten value funds (including our own First Eagle Global) were much above average. So why so few value investors? They’re patient, long-term investors who therefore every now and then lag behind their peers and the benchmark. And to lag is to suffer. Value investors understand that the rewards come over time. No immediate gratification.

In the recent (and continuing) financial crisis, many value investors learned a lesson: it’s no longer enough to be entirely bottom-up investors. A key question today is whether we are still in the economic and financial landscape of the post-Second World War period or are we in a new, so far undefined landscape?

BORN Poitiers, France, 1940.

EDUCATION Eveillard is a graduate of Écoles des Hautes Études Commerciales, an esteemed French graduate school for business studies.

CAREER He started his career in 1962 with the French bank Société Générale until relocating to the US in 1968. Two years later, Eveillard began as an analyst with the SoGen International Fund. In 1979, he was appointed as the portfolio manager of the fund, later renamed the First Eagle Global Fund. After managing it for over thirty years, he now serves as senior adviser.

INVESTMENT PHILOSOPHY Eveillard is a long-term international stock market value investor, with a history of investing against the herd. In contrast to most value investors, he also has a top-down scenario. Another difference is in valuations, where he focuses on the enterprise value to EBIT. Preservation of capital is of highest priority. In general he buys stocks of companies that are financially safe, where there is very little or no debt, and whose intrinsic value is seen as being well above the current stock price. He is suspicious of low tax, which he thinks is usually a sign that profits are overstated. His remark ‘I know the argument that you should only own your best 30 or 40 ideas, but I’ve never proven over time that I actually know in advance what those are’ explains why he usually has more than 100 positions in his portfolios. He has kept a gold position in his funds as ‘calamity insurance’ for several years. He regards his investment style to be sometimes in the Benjamin Graham (deep-value) mode, but more often in the Warren Buffett mode.

OTHER Eveillard took the First Eagle Global Fund from $15 million to its current $20 billion in assets. He managed the fund alone for the first seven years. When Eveillard’s successor abruptly resigned, he made a comeback aged 67. He is fond of the Austrian School of economics. In 2003, together with Ralph Wanger, he was the first to receive the Lifetime Achievement Award from Morningstar for building one of the most successful long-term records in the investment business. Through the Eveillard Family Charitable Trust he has provided support to a wide range of institutions in the arts, education, and social services. He enjoys going to the opera, and collects drawings in the same contrarian manner as he acquires securities.

Sources: Jean-Marie Eveillard; First Eagle Global Fund 1979–2011; Forbes, September 2009; Wikipedia.

Richard H. Driehaus

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

A stock’s price is rarely the same as the company’s value. Reason for that is the valuation process is flawed. Stock prices are heavily affected by market dynamics and by investors’ emotions. These emotions swing widely from pessimism to optimism. Also, many investors buy stocks with the intention of holding them for several years based upon information that really only applies to a short-term time horizon. While the information they are using to invest may be valuable, it is often the wrong information for their investment timeframe. If people invest in a company based on current information, they have to be prepared to act on any changes to that information in a much shorter timeframe than most investors are prepared to do. So therefore I respond more readily to new information than other investors. Nevertheless, one has to constantly compare a stock’s technical and fundamental earnings growth rate against other stocks that may not be in the portfolio, but that have even better technical and fundamental outlooks. It is interesting to note the 80:20 rule here: fewer than 20 % of my stocks have produced more than 80 % of my gains.

Often when I talk to consultants, they like to see a very systematic, value-based process. They think that each stock has to be submitted to some type of disciplined, precise, and uniform evaluation. But the real world is not that precise. I’m convinced there is no universal valuation method. In fact, in the short run, valuation is not the key factor. Each company’s stock price is unique to that company’s place in the market environment and to its own phase in its corporate development. We don’t ignore value, but realize in the short-to-intermediate term it is not the determinant factor in a stock’s price movement. It has been said in the short term, a stock’s price is like a voting machine, but in the long term it’s a weighing machine. Over a full market cycle, the daily price action of a stock is irrelevant to the longer-term worth of a company.

Most people believe high turnover is risky. Again, I think just the opposite. High turnover reduces risk when it is the result of taking a series of small losses in order to avoid larger losses. I don’t hold on to stocks with deteriorating fundamentals or price patterns. For me, this kind of turnover makes sense. It reduces risk. More money can be made buying high and selling at even higher prices. I try to buy stocks that have already had good price moves, that are often making new highs, and that have positive relative strength. These are stocks in demand by other investors. The risk is that I’m buying near the top. But I would much rather be invested in a stock that is increasing in price and take the risk that it may begin to decline than invest in a stock that is already in a decline and try to guess when it will turn around. The above philosophy is most successful in a bull market. In bear markets, the largest gains may come from stocks that have declined the greatest percentage from their previous highs. Look for individual stocks with saucer bottoms or other technical indications that the stock is about to rebound. Another strategic approach is to buy a class of stocks and/or a specific sector (such as technology) in the bottom decile(s) from their former peaks. Some of the best opportunities may be in stocks recovering from a significant market decline. For example, in the short-to intermediate term, tech stocks that have been oversold have doubled in just one quarter from a major bottom. Further gains could ensue after that. In the long term, classic growth stocks can provide the best returns over a full market cycle. Remember, most investors over-diversify; it’s best to concentrate on your best ideas.

BORN Chicago, USA 1942.

EDUCATION Driehaus earned his B.Sc. in 1965 and in 1970 took an MBA at DePaul University’s College of Commerce (now the Driehaus College of Business).

CAREER After 14 years as a stock analyst and fund manager, in 1979 Driehaus founded the brokerage Driehaus Securities Corporation LLC. Three years later he founded Driehaus Capital Management LLC, where he is still responsible for investments and chairs the board.

INVESTMENT PHILOSOPHY Driehaus is best categorized as an international growth investor. His cornerstones are accelerating sales and earnings plus relative price momentum. In addition, he looks for companies with strong, consistent, and sustained earnings growth. He is principally a bottom-up investor. He believes the application of technical analysis is essential to identify timely investments in attractive stocks and industries.

OTHER In 2000, Driehaus was named in Barron’s ‘All-Century’ team as one of the 25 most influential people in the mutual-fund industry in the past hundred years. Driehaus has roughly $7.5 billion in assets under management. Through philanthropic- and community-service-oriented projects he supports conservation of classic architecture and the arts, reflecting his belief that beauty and the arts provide much-needed balance in a person’s life. 2008 opened the Richard H Driehaus in Chicago.

Sources: Richard H. Driehaus; Driehaus Capital Management LLC; Mid Cap Growth Composite.

Shelby C. Davis

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

·       You make most of your money in a bear market. You just don’t realize it at the time.

·       Great companies bought at great prices should be like great friends—you do not want to drop them precipitously.

·       History provides a crucial insight regarding market crises: they are inevitable, painful, and ultimately surmountable.

BORN Peoria, Illinois, USA 1909. Died 1994.

EDUCATION Davis graduated from Princeton University and took a Master’s at Columbia University in 1931. He earned a Ph.D. in political science at the Graduate Institute of International Studies, Geneva, in 1934.

CAREER His studies complete, he first worked at his brother-in-law’s investment firm for five years before becoming a freelance writer. Aged 38 he got $50,000 in seed capital from his wife and founded Shelby Cullom Davis & Company, mainly to manage insurance stocks. Between 1969 and 1975 he was also US Ambassador to Switzerland.

INVESTMENT PHILOSOPHY Davis was a specialized stock market value investor. He only invested in companies he knew well and where he had an edge (insurance companies in most cases). He focused on fundamentals, and especially looked for a solid balance sheet making sure the insurer did not hold risky assets such as junk bonds. He then measured the management quality and made trips to meet with management and drill them. He searched for what he called ‘compounding machines’, but equally he liked a boost from earnings and from investors bidding up the multiple. The strategy was known as the ‘Davis Double Play’. It was a buy-and-hold strategy, and he kept a long-term perspective through bull and bear markets. He was probably one of the first US investors abroad when he invested in Japanese insurance companies in the early 1960s. He recommended diversification, so that the ones you were wrong about were balanced by the ones you were right about.

OTHER By the time of his death in 1994, he had turned the original $50,000 stake into $900 million. In 47 years he had increased his stake 18.000 fold! The strategy of focusing on the insurance industry came to him after he had studied Benjamin Graham’s writings. Davis made the Forbes 400 list in 1988, and other than Warren Buffett he was the only one to make the list by picking stocks for a living. He gave all his wealth to a charitable trust and was known for extreme frugality – instead of playing tennis with new balls he used old, ratty ones.

Sources: John Rothschild, The Davis Dynasty (2001); Investopedia; Wikipedia.

Michael Farmer

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

·       Go where there is little risk, but where there is potential for great reward—Opportunity.

·       Don’t get euphoric!—Wife’s wisdom.

·       Sell what you haven’t got and buy what you don’t want—Contrarian.

·       Fear God, not man—We’re not here forever.

BORN Kent, UK 1944.

EDUCATION Secondary school.

CAREER Farmer left school at 18 and went to work at A. J. Strauss, a metals trading firm in the City. He started as a ‘difference account clerk’. Between 1984 and 1989, he managed the non-ferrous metals positions at Philipp Brothers, the biggest global metal trader of that period. He left in 1989 to form the Metal & Commodity Company, a subsidiary of Metallgesellschaft AG, which became the world’s largest trader in physical copper and nickel and was floated on the London stock market in 1999. One year later it was sold to Enron. After taking two years off to study the Bible he founded RK Capital Management with two partners in 2004.

INVESTMENT PHILOSOPHY Farmer is a commodity investor specializing in copper. His road to success is concentration, experience, and profound knowledge. He and his team try to be more up-to-date about the copper market – both suppliers and customers – than anyone else. Often being contrarian in this highly volatile market also requires a big portion of guts and stamina. In 2006 the fund was up by 188% followed by 50% decline the year after. Farmer probably stands for one of the most volatile investments in this book. This, despite the fact that he does not deal much in options and futures, but instead trades physical base metals between producers and consumers. Farmer says his faith makes him a better money manager by keeping him humble.

OTHER He is nicknamed Mr. Copper and he is regarded as one of the most successful commodity traders in the world. He and his team manage at present £2.3 billion. In 2011 he topped Bloomberg’s league of global mid-cap hedge-fund returns, and was named the most successful small hedge-fund manager in the world. Despite the resent tough and volatile environment in the metal market - when peers has struggle and several closed down the operation – Farmer has the last three years delivered double digits yearly return. Farmer is often responsible for shipping around 15–20% of China’s copper supplies. He has donated £2.3 million to the British Tories and in 2012 was appointed co-treasurer of the Conservative Party. He is an active Christian.

Sources: Michael Farmer; RK Capital Management; Bloomberg; Wikipedia.

Philip Carret

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Philip Carret’s twelve commandments for speculators:

1.      Never hold fewer than ten different securities covering five different fields of business.

2.      At least once every six months reappraise every security held.

3.      Keep at least half the total fund in income-producing securities.

4.      Consider yield the least important factor in analysing any stock.

5.      Be quick to take losses, reluctant to take profits.

6.      Never put more than 25 % of a given fund into securities about which detailed information is not readily and regularly available.

7.      Avoid ‘inside information’ like the plague.

8.      Seek facts diligently; advice never.

9.      Ignore mechanical formulas [such as price–earnings ratios] for valuing securities.

10.   When stocks are high, money rates rising, and business prosperous, at least half a given fund should be placed in short-term bonds.

11.   Borrow money sparingly and only when stocks are low, money rates low or falling, and business depressed.

12.   Set aside a moderate proportion of available funds for the purchase of long-term options on stocks of promising companies whenever available.

BORN Lynn, Massachusetts, USA 1896. Died 1998.

EDUCATION He graduated from Harvard College and spent one year at business school.

CAREER Carret first spent a couple of years working in the financial industry. Then, while a reporter and feature writer for the financial magazine Barron’s he began managing money for family and friends in 1924. He went on to establish what evolved into the Pioneer Fund in 1928. Later he founded Carret Zane Capital in 1962. He kept managing the fund until 1983, aged 87.

INVESTMENT PHILOSOPHY The title of one of his books, The Art of Speculation, gives the false image of a short-term trader. Carret was the opposite, being the first famous value investor. He did his own research, analysed data, and only invested in a company if its stock price did not reflect the company’s real value, and if he saw potential for growth. His remark ‘There is no substitute for buying quality assets and allowing them to compound over the long term. Patience can produce uncommon profits’ described his main objective. Small over-the-counter stocks represented a substantial part of his portfolio and he preferred to buy semi-listed stocks, which were not so often subject to course manipulation. A strong balance sheet was a crucial prerequisite for investment. He believed that options were useful when the market was bad, and as a rule he even kept cash available just for that. Leverage was used only when the market was low and there was extreme fear. He was mainly a stock market investor, but also used the bond market from time to time. He regarded the footnotes appended to annual reports as the most useful source of information.

OTHER Carret is famous for having the longest history of investing. His had 55 excellent compounded gain years as a fund manager despite major depressions, recessions, and world war. He founded the Pioneer Fund six years before Benjamin Graham first published Security Analysis. He was said to be a voracious reader. Warren Buffett and Carret exchanged ideas on a regular base for several years. At the 1996 Berkshire Hathaway Annual Meeting, Warren Buffett said: ‘The main thing is to find wonderful businesses, like Phil Carret, who’s here today, always did. He’s one of my heroes, and that’s an approach he’s used. If you’ve never met Phil, don’t miss the opportunity. You’ll learn more talking with him for fifteen minutes than by listening to me here all day.’ Carret wrote two books and continued to work on Wall Street even after he had turned a hundred. He was an avid chaser of eclipses and travelled the world to view them. His grandfather had been Napoleon’s paymaster general.

Sources: Philip Carret’s twelve commandments for speculators; Pioneer Fund; Pioneer Investment; Wikipedia.

William J. Ruane

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Buy good businesses. The single most important indicator of a good business is its return on capital. In almost every case in which a company earns a superior return on capital over a long period of time it is because it enjoys a unique proprietary position in its industry and/or has outstanding management. The ability to earn a high return on capital means that the earnings which are not paid out as dividends, but rather retained in the business, are likely to be reinvested at a high rate of return to provide for good future earnings and equity growth with low capital requirement.

Buy businesses with pricing flexibility. Another indication of a proprietary business position is pricing flexibility with little competition. In addition, pricing flexibility can provide an important hedge against capital erosion during inflationary periods.

Buy net cash generators. It is important to distinguish between reported earnings and cash earnings. Many companies must use a substantial portion of earnings for forced reinvestment in the business merely to maintain plant and equipment and present earning power. Because of such economic under-depreciation, the reported earnings of many companies may vastly overstate their true cash earnings. This is particularly true during inflationary periods. Cash earnings are those earnings which are truly available for investment in additional earning assets, or for payment to stockholders. It pays to emphasize companies which have the ability to generate a large portion of their earnings in cash.

Buy stock at modest prices. While price risk cannot be eliminated altogether, it can be lessened materially by avoiding high-multiple stocks whose price–earnings ratios are subject to enormous pressure if anticipated earnings growth does not materialize. While it is easy to identify outstanding businesses, it is more difficult to select those which can be bought at significant discounts from their true underlying value. Price is the key. Value and growth are joined at the hip. Companies that could reinvest at 12 per cent consistently with interest rate at 6 per cent deserve a premium.

BORN Chicago, USA 1925. Died 2005.

EDUCATION Ruane graduated from the University of Minnesota in 1945 with a degree in electrical engineering and a Master’s from Harvard Business School in 1949.

CAREER After one year at General Electric he went to work for Kidder Peabody, where he stayed for 20 years. Aged 45, Ruane founded his own investment firm, Ruane Cunniff, with partner Rick Cunniff, and the same year they launched their flagship Sequoia Fund.

INVESTMENT PHILOSOPHY As a student and disciple of value investment guru Benjamin Graham, his profile as a stock market investor is obvious. In addition to the above ‘insights’ it is worth mentioning his meticulous attention to detail. He needed to understand a company and therefore had no taste for tech stocks. The Sequoia Fund today holds a moderately diversified portfolio of 75 positions, both large and small caps. Average holdings are around three years.

OTHER He met Warren Buffett at an investment seminar with Benjamin Graham and he and Buffett became lifelong friends. Most of their customers came to Ruane Cunniff on Buffett’s recommendation. Ruane also served on numerous boards, including those of Geico, Data Documents Inc. and the Washington Post. He was a great philanthropist and adopted a block in Harlem, renovating buildings and establishing clinics and community service programs. He also funded educational programs on Indian reservations, and supported mental health charities. In addition, he set up TeenScreen, a nationwide organization that tests teenagers for symptoms of depression and other suicide risk factors. Humor and concern for others was his mantra.

Sources: Ruane’s ‘Four rules of smart investing’ from his lecture at Columbia University, compiled by Brian Zen; Life in legacy; Wikipedia.

James H. Simons

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

·       There is no real substitute for common sense except for good luck, which is a perfect substitute for everything.

·       Statistic predictor signals erode over subsequent years; it can be five years or ten years. You have to keep coming up with new things because the market is against us. If you don’t keep getting better, you’re going to do worse.

·       The most important issue is to hire great people because they do a first-class job, offer people great infrastructure, have an open atmosphere and get people compensated on the overall performance.

BORN Newton, Massachusetts, USA 1938.

EDUCATION Simons received a B.Sc. in Mathematics from MIT in 1958 and, aged 23, a Ph.D. in Mathematics from the University of California, Berkeley.

CAREER After four years as a member of the research staff at the Communications Research Division of the Institute for Defense Analyses he was appointed chairman of the math’s department at Stony Brook University. Aged 40 he left academia to run an investment fund that traded in commodities and financial instruments on a discretionary basis. In 1982 he launched the hedge fund Renaissance Technologies. He retired on 1 January 2010, but remains at Renaissance as non-executive chairman.

INVESTMENT PHILOSOPHY Simons is the most successful now living quantitative money manager. Renaissance’s models are based on analyzing as much data as can be gathered, then looking for non-random movements to make predictions–a strategy that is not easy to copy. The Renaissance approach requires that trades pay off in a limited, specified timeframe. If a big transaction is about to take place on the market Renaissance pushes to the front of the queue. Simons himself explained the strategy in an interview: ‘Efficient market theory is correct in that there are no gross inefficiencies but we look at anomalies that may be small in size and brief in time. We make our forecast. Then, shortly thereafter, we re-evaluate the situation and revise our forecast and our portfolio. We do this all day long. We’re always in and out and out and in. So we’re dependent on activity to make money.’ In doing this, Simons surrounds himself with like minds: mathematicians, physicists, astrophysicists, and statisticians. About a third of the 275 employees have doctorates.

OTHER Renaissance Technology manages $15 billion at present and is one of the most profitable hedge funds in the world, despite its high fees. (5 % in fixed fee plus 44 % in performance fee) Simons alone earned an estimated $2.5 billion in 2008, and with an estimated net worth of $12 billion, he is one of the richest individuals in the world. The Financial Times named him ‘the world’s smartest billionaire’ 2006. Simons’s most influential research involved the discovery and application of certain geometric measurements, and resulted in the Chern–Simons form (also known as Chern–Simons invariants or Chern–Simons theory). Simons has been known to show up at formal business meetings without socks. He is an active participant in a variety of philanthropic endeavors. Supporting autism research is one.

Sources: James A. Simons – lecture at International Association of Financial Engineers annual conference 2006; as well as at MIT, 2010; Greenwich Roundtable Medallion Fund; Wikipedia.

Francisco Garcia Paramés

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Personality vs intelligence: 90 % of investors with whom we discuss our investments agree on the attractive nature of these investments. But only a very small proportion is prepared to take the next steps: invest and then wait for as long as necessary. One must be able to ignore market movements and any institutional obligations, even emphasize one’s convictions by increasing the investment when the markets do not look favourable. In short, it is essential to know oneself, and along with a normal IQ, the determining factor will be character.

A good backup to these qualities is references. For anyone (particularly in Madrid, which is not renowned for its investing tradition), the sense of security achieved by following in the steps of an experienced investor is very important. Both in the good times (when in either absolute or relative terms, things are going well) and the bad, analysing the careers of investors who have been through similar situations allows one to act with conviction and maintain a long term view, something which can sometimes be lost.

Never stop learning: When we invest, we must have strong conviction and determination in the process. To have permanent doubts is pointless, in spite of the fact that uncertainty is a constant. But that conviction must go hand in hand with a permanent capacity to learn – not an easy thing to do. For example, a couple of years ago at Bestinver, following a good track record over the previous fifteen years, we came across a (little) book by a well-known investor which caused us to fine-tune our strategies, although without actually altering the essentials. It is not easy to conjugate ‘conviction’ and ‘open mind’ in the same sentence, but it must be done!

Economic framework: The majority of well-known investors command a relatively superficial knowledge of the so-called ‘economy’. I arrived at the Austrian School of economics after eight years as an investor, and I did so precisely because it provided a theoretical framework to what I was seeing every day in the market, namely, human action. Only here it was it explained in incentives, objectives, consequences, etc – that is, life itself. Thanks to Mises and Hayek, among others, we can navigate through an investors’ world with a compass that shows us over which waters we can sail, and which we cannot.

BORN Galicia, Spain 1963.

EDUCATION García Paramés has an Economics degree from the Complutense University of Madrid, and took an MBA at the IESE Business School (Barcelona) 1989.

CAREER García Paramés started his career at Bestinver as a stock analyst in 1989. His passion for investment led him to asset management, and he was soon named CIO of the company, where he remains to this day.

INVESTMENT PHILOSOPHY García Paramés’s management style is based on the strict application of the principles of value investment (Graham, Buffett, etc.), within a framework of a profound knowledge of the Austrian School’s theory of economic cycles. Pricing power and cash flow are important parameters in the analyses. García Paramés avoids investments where he cannot forecast the next ten years. During the last few years the portfolio has shifted to only include quality companies. He never fights the management.

OTHER Nicknamed ‘the Warren Buffett of Europe’, his more recent fund, Bestinver Internacional (Global Equity Fund), launched 1998, has an annual return of almost 11 %, beating the benchmark (2 %) by a factor of more than five. Bestinver has now more than than $12 billion in asset under management. He is a self-taught investor, similar to some of the other superstars. It is especially impressive since he is from Spain, which has no long tradition of investing. He speaks and reads five languages.

Sources: Francisco García Paramés; Bestinver; Wikipedia.

Charles M. Royce

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

·       We are risk managers first and foremost.

·       You cannot eat from the table of relative returns.

·       Bad business models can’t be cured by valuations.

BORN Washington DC, USA 1939.

EDUCATION He received a BA in Economics from Brown University and an MBA from Columbia University.

CAREER Prior to founding Royce & Associates in 1972 at the age of 32, Royce was director of research at Scheinman, Hochstin, Trotta, a brokerage firm. He was also a security analyst at Blair & Co. for a spell. Royce remains president and CEO of Royce & Associates, and is still portfolio manager for several funds in the group.

INVESTMENT PHILOSOPHY Royce is a disciplined small cap long-term value stock investor. His is a bottom-up investment approach looking for high quality companies with the potential for a successful future that have the following characteristics: strong balance sheets: high internal rates of return; and the ability to generate free cash flow and dividends.

He bases his assessment of a company’s value on either what he believes a knowledgeable buyer might pay to acquire the company or what he thinks the value of the company should be in the stock market. Mid-2012 the average position was valued at 1.8 times book value, and had a trailing price earnings multiple of 14.7, as opposed to 15.3 for the Russell 2000 Index.

Unlike most other small-cap investors, Royce is not focused on growth companies. The typical target is a high quality smaller company that is cheap because of cyclical or temporary company-specific issues, often an obscure small cap in a mundane market with a good track record. Further, he prefers to buy into companies whose management has been in place five years or more. The average holding horizon of a position is three to five years.

Royce’s is a very demanding strategy in both time and effort. A great deal of time is spent interviewing senior management as well as customers, suppliers, and competitors. Royce tries to reduce the risk by owning a wide variety of stocks, across many sectors and industries.

OTHER Despite the long period in question – fully 40 years – the fund has far outperformed the benchmark (Russell 2000) in every single short- and long-term time frame, an impressive achievement considering assets under management now amount to roughly $40 billion. Royce made recently a $5.5 million gift to his alma mater, Brown University, to fund six professorships. He is engaged in several philanthropic projects as well as the restoration and preservation of landmark buildings. He belongs to the Episcopalian Church and always wears a bow tie.

Sources: Charles M. Royce; Royce Pennsylvania Mutual Fund; The Royce Funds; Forbes.

Shuhei Abe

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

I believe that the most important thing is to understand what you’re good at. There are many legendary investors who have experienced remarkable success. In my opinion, each of these investors has had their own unique way of understanding and simplifying the complexity of their environment. Except for the first few years, I have been investing in a declining market for more than two decades. I survived because I stuck to the areas that I feel I understand. Despite extreme pessimism, there have always been opportunities where I could arbitrage the value gap. When price is excessively below a firm’s value, you can still make money even in the worst of market environments.

My first principle is that no one can correctly predict the future. Therefore, when you evaluate potential investments, your thinking model should be simple. The variables that you consider in your model should not be too many. In the end, trying to predict something you cannot know is like throwing a dart in the dark. The foundation for your investment decision should therefore be based on what you can see and what you can hear.

When evaluating a potential investment, I look at three variables. First, I consider the sustainability of the firm’s business model. Any business can be described by a simple equation, or sales less expenses. As an example, when analysing a firm’s future sales, growth is defined by whether the unit price can be increased and more units can be sold. Secondly, it is important to evaluate the general industry outlook and its potential size to determine the company’s edge and ability to maintain its profit margin. Naturally, a strong company in a growing market would make an attractive investment candidate, but in Japan, I have observed cases where a company is still able to grow in a shrinking market. And finally, who is the person that decides the future course of the firm. Is he or she trustworthy? Is he or she creative and innovative? Does he or she have a track record or the potential to build a scalable business? Focusing on these three variables alone, I believe you are able to identify whether the company has a real edge or not. In my view, this approach makes it easier to make an investment decision rather than trying to consider all potential variables.

BORN Sapporo, Japan, 1954.

EDUCATION Abe graduated in economics from Sophia University in Tokyo, followed by an MBA from Babson College in the US in 1982. He completed Harvard Business School’s Advanced Management Program in 2005.

CAREER Abe began his career as an analyst for the Nomura Research Institute (Japan). He continued with three years in Japanese equity sales for Nomura Securities International in New York. Aged 31 he formed Abe Capital Research in 1985, where he managed Japanese equity investments for American and European investors. Four years later he founded the Tokyo-based SPARX Group. Abe continues to lead the SPARX Group as chairman and CEO.

INVESTMENT PHILOSOPHY Abe is a value investor, but likes to focus on evaluating the industry and business models. In addition he spends a great deal of time assessing company management. He is said to have an aggressive investment style, taking large stakes in companies and then working with management to enhance the value of their firms. This approach – relationship investing – includes teaming up with strategic operating partners to help companies realize their full potential. He is regarded as an activist.

OTHER He is said to be a disciple of George Soros, whom he has worked for. Abe was one of the first hedge-fund managers in Japan. SPARX Group is also the first independent, publicly traded investment firm in Japan, with approximately $7 billion in assets under management and offices in Hong Kong and Seoul. From being a Japanese equities small-cap boutique he has transformed the company into one of Asia’s largest alternative investment firms. He is a guitar player and painter in his spare time.

Sources: Shuhei Abe; SPARX Asset Management; Wikipedia.

T.Boone Pickens

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Chief executives, who themselves own few shares in their companies, have no more feeling for the average stockholder than they do for baboons in Africa. Always keeping in mind that shareholders are the owners of a company, while members of the management are employees.

Far too many executives have become more concerned with the four P’s – pay, perks, power, and prestige – rather than making profits for shareholders.

Show up early, work hard, stay late. Work eight hours and sleep eight hours, and make sure they are not the same eight hours.

BORN Oklahoma, USA 1928.

EDUCATION Pickens graduated from Oklahoma A&M (now Oklahoma State University) with a degree in geology in 1951.

CAREER He started his career at Phillips Petroleum in 1951. In 1956 he founded the company that would later become Mesa Petroleum, which turned into one of the world’s largest independent oil companies. In the 1980s, Pickens became famous as a corporate raider, with several big deals of which Gulf Oil was among the largest. By the mid-1990s he gave up his raiding after a brutal and expensive fight with Unoca. In 1997 Pickens founded BP Capital Management. He holds a 46 % interest in the company, which runs two hedge funds, Capital Commodity and Capital Equity.

INVESTMENT PHILOSOPHY Pickens is an oilman and shareholder activist who in later years has become a hedge-fund manager. He is entirely concentrated on the energy sector, mostly in oil. His analysis starts at the top, with a scenario for the different forms of energy, from where he drills down to the individual company. He prefers to seek out badly run companies where he can influence their governance and management. In his role as a hedge-fund manager he has a different strategy to his earlier days, when he was an activist and would even buy whole companies (in those days there were many deals which never came to fruition, but with enough noise and fuss the stock rose nevertheless and Pickens was able to exit with excellent profits).

Pickens’s key characteristics as an investor are his knowledge of the energy sector, endurance, and courage. He is possibly one of the most risk-inclined investor in this book. One example is how through his company Mesa Petroleum he bought the thirty-times larger Hugoton Production. His hedge funds are not for the weak of heart either. One of them was founded in 1997 and lost 90 % in two years. The other hedge fund showed an annual return of 38 % for six years, before becoming one of the greatest loss-makers in the sector in 2008. Pickens’s reckless style is perhaps best described in his own words in a quotation from Katherine Burton’s book Hedge hunters: ‘Most of my ideas work, but the timing gets screwed up every once in a while.’

OTHER He was involved in the creation of the United Shareholders Association. Pickens has been (but not any more due to strides in technology have altered the energy landscape) outspoken on the issue of peak oil, and advocates alternative and renewable energy sources such as solar and wind. In 2007 Pickens earned $2.7 billion as the Capital Equity Fund increased 24 % after fees, and the $590 million Capital Commodity fund grew 40 %. Pickens has donated more than $1 billion to charity. According to Forbes he is “only” worth 1.6 billion US dollars today.

Sources: T. Boone Pickens, The First Billion is the Hardest (2008); Katherine Burton, Hedge hunters: After the Credit Crisis, How Hedge Fund Masters Survived (2007); boonepickens.com; Businessweek; Insider Monkey; CNBC

Richard Perry

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

Richard Perry’s investment aphorisms:

·       Every investment should be measured on an expected value basis – how much can I make, how much can I lose, and what are the probabilities associated with each outcome.

·       Don’t listen to what people say or write, try to intuit what they mean.

·       Good investors use a combination of brains and gut. To paraphrase Leonardo Da Vinci, one must understand the science of art and the art of science.

·       By the time your analysis is perfected the investment opportunity is probably gone.

·       There are many different investment strategies. Focus on the ones you do best and avoid the ones you do poorly.

·       Value is buying a dollar for 50 cents and having a business plan that turns that 50 cents back into a dollar. Value traps are buying a dollar for 50 cents and a business plan that makes that dollar worth dramatically less than 50 cents.

·       People will behave as they are incented to behave.

·       Translate complex theories into simple statements.

·       Beware of obsolescence.

·       Sales and marketing are critical components of a successful business.

·       Invest like a local.

BORN Los Angeles, USA 1955

EDUCATION Richard Perry has a BA from the University of Pennsylvania’s Wharton School in 1977, and an MBA from New York University’s Stern School of Business in 1980.

CAREER Perry began his career at the options trading desk at the investment bank Goldman Sachs in the mid-1970s. When he left in 1988 to start the hedge fund Perry Capital he was working in equity arbitrage, while lecturing on finance at the Stern School of Business at New York University. He has been CEO of Perry Capital from the start.

INVESTMENT PHILOSOPHY Perry could be described as an event-driven, value-oriented, multi-strategy hedge-fund manager. He controls a number of strategic positions simultaneously, and bases his business model on having several different income streams. One strategy is to seek out companies that have the potential to restructure through acquisitions or disposals, often those in reconstruction after bankruptcy. Another area is investments in distressed loans. However, he also invests in unlisted companies and property, and uses his cash supply to lend money at high returns to investors who are not able to lend from banks. He usually works with a neutral portfolio and with lending. He has called his approach ‘expected value analysis’: it is based on calculating the percentage likelihood of various outcomes and multiplying them by the current bond price, after which he compares the expected value with the current market price to determine whether he should buy or sell. Every now and again he becomes deeply engaged with a particular investment. Recently, he became the principal owner of Barneys New York, a luxury American chain store.

OTHER At present Perry manages $10 billion in assets. For the first 19 years, his hedge fund did not have a single deficit year. Perry was also one of a few on Wall Street to start betting against subprime mortgages as early as 2006. He is the chairman of the board of Barneys New York Inc. and a member of the boards of trustees of Facing History and Ourselves. His mentor at Goldman Sachs was Robert Rubin, US Secretary of the Treasury during the Clinton administration. Perry is an avid collector of pop art and a triathlon runner.

Sources: Richard Perry; Perry Capital.

Ray Dalio

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Investor profile at InvestingByTheBooks: The book The World’s 99 Greatest Investors: The Secret of Success provides a unique opportunity to learn form the most prominent investors globally. In the book they generously share their experiences, advice and insights and we are proud to present these excerpts. Magnus Angenfelt, previously a top ranked sell side analyst and hedge fund manager, will be presenting one investor per month. For those who cannot wait for the monthly columns, we strongly recommend you to buy the book. The investor himself writes the first section below and then Angenfelt describes the background of the investor and comments on his investment philosophy. Enjoy.

While most others seem to believe that mistakes are bad things, I believe mistakes are good things, because I believe that most learning comes via making mistakes and reflecting on them. Blaming bad outcomes on anyone or anything other than oneself is both incorrect and subversive to one’s progress. It is incorrect because bad things come at everyone, and it is your challenge and test to successfully deal with whatever comes at you. Blaming bad outcomes on anyone or anything other than oneself is essentially wishing that reality were different than it is, which is silly. It is also subversive because it diverts one’s attention away from mustering the personal strength and other qualities that are required if one is to produce the best possible outcomes. Remember, Nature is testing you, and it is not sympathetic.

Everyone has weaknesses. The main difference between unsuccessful and successful people is that unsuccessful people don’t find and address them, and successful people do. That is why, as one of our managers has observed, reflective people are much more successful than deflective people.

In order to make money in the market you have to be an independent thinker. And, I think, creative too.

 

BORN Queens, New York USA 1949.

EDUCATION Dalio received a BA from Long Island University and an MBA from Harvard Business School in 1973.

CAREER Dalio worked on the floor of the New York Stock Exchange and invested in commodity futures. After his MBA, he started work as director of commodities at Dominick & Dominick LLC. In 1974, he became a futures trader and broker at Shearson Hayden Stone. In 1975, aged 26, he founded the investment management firm, Bridgewater Associates where he is president, co-CIO and mentor.

INVESTMENT PHILOSOPHY Dalio is a hedge fund investor with macro investments as his specialty. He is a master of the diversification needed to enable him to steer his giant funds. He bets mainly on economic trends, such as changes in exchange rates, inflation, and GDP growth round the globe. He spends most of his time trying to figure out how economic and financial events fit together in a coherent framework. Bond and currency markets, in which Dalio is an expert, are widely believed to represent the greatest bulk of profits historically. But he is also active in other asset classes. Gold was one of the company’s largest contributors in 2010. In stocks Bridgewater tends to make relatively small, but numerous equities investments, sometimes having several hundred equity positions. He regards the consensus as ‘often wrong’, which is why he judges independent thinking to be the main criteria in managing money.

OTHER He is said to be intelligent and idiosyncratic, and manages the world’s largest hedge fund with $140 billion in assets and 1,200 employees. In 2011, Bridgewater was ranked both the largest and the best-performing hedge-fund manager in the world, which is a unique combination. With its 39 billion profit in US dollars for clients Bridgewater has furthermore become the hedge fund with the second highest yield ever in absolute figures. The last 18 years’ performance is estimated to have been 15 % annually before fees. One of the more striking features of Bridgewater Associates is the corporate culture that Dalio has created. Dalio has presented the concept in a 123-page online book, Principles. He bought his first shares at the age of 12, and according to the Forbes he had a net worth of US$12.9 billion as of 2013. Dalio is a practitioner of transcendental meditation; his main hobby is music – jazz, blues, and rock ‘n’ roll (his father was a jazz musician). Recently, he joined a philanthropic campaign, pledging to give away at least half of his money.

Sources: Ray Dalio, Principles; CNBC; Bridgewater Associates; gurufocus.com; The New Yorker, 2011; Wikipedia.