Edward Lampert

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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.

The idea of anticipation is key to investing and to business generally. You can’t wait for an opportunity to become obvious. You have to think, ‘Here’s what other people and companies have done under certain circumstances. Now, under these new circumstances, how is this management likely to behave?’

One of the things I try to advocate to other investors and companies is that if you can have a large long-term investor then you have the ability to run the company for the long term.

So much time and money ends up spent ensuring that the financial statements are immune from criticism that it can become much more of a distraction than a useful tool for investors and managers.

BORN New York, USA 1962.

EDUCATION Lampert graduated with a BA in Economics from Yale University in 1984.

CAREER After school he started as an intern at Goldman Sachs. Inspired by Warren Buffett’s letters to shareholders he left its risk arbitrage department in 1988 to start his own hedge fund ELS aged 26. He still serves as chairman and CEO.

INVESTMENT PHILOSOPHY Lampert defines himself as an “aggressive conservative” investor; one could also say a ‘concentrated value’ investor. He is uncommon for a hedge-fund manager in that he is a mix of investor and businessman. He is, among other things, CEO and chairman of Sears, the gigantic retailer store which is ELS largest holding and accounting for more than a third of the assets. Lampert focuses on finding companies that are seriously undervalued, and he is willing to target poorly run ones because they can produce greater returns if the right changes are made. As a result, Lampert is more hands-on with management, and the number of investments is normally below ten, although intimately known holdings are kept for several years.

Lampert’s style of investment requires a more detailed knowledge of the business, company management, and its values, than those who invest for shorter periods of time. He seems to prefer mature and easily understandable companies that generate lots of cash. He thinks past performance used as a measure of quality is wildly overrated. When investing, he focuses intensely on how their companies allocate capital to maximize returns. Lampert has significant experience investing in retail, even if his first retail investment was only in 1997. He does not have any known shorting strategy.

OTHER Lampert has carefully studied Buffett for years. He went back and read annual reports in the couple of years preceding some of Buffett’s investments: ‘Putting myself in his shoes at that time, could I understand why he made the investments?’ He has also been nicknamed ‘the new Warren Buffett’. Lampert is most famous for forming and merging Kmart and Sears into Sears Holdings. He took control of Kmart (the third largest discount store chain in the US, then with above $20 billion in sales) by buying up debt during its bankruptcy, cutting costs and by then reduce the workforce by 34 000 employees. Due to underperformance in Sears the asset under management in ELS has recently dropped from 10 to around $2,5 billion. Lambert’s earnings in 2004 were estimated to be $1.02 billion, making him the first Wall Street financial manager to exceed an income of $1 billion in a single year. Forbes estimated his wealth to be $2.9 billion in 2013. In 2003 Lampert was kidnapped, but he managed to talk himself out of the situation and was released after two days.

Sources: Edward Lampert; CNNMoney; Bloomberg; Sears annual letter to shareholders, 2008; the Third Avenue Management Investor Conference and Luncheon, 18 November 2003; BusinessWeek, 2007; Wikipedia; online.wjs.com, the performance is estimated.

Best Practice Asset Managers

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If you are an active asset manager your raison d’être is to outperform the market, i.e. the other investors. Yet, many pension funds, insurance companies and mutual funds haven’t specified what their competitive edge is. Instead too many mimic what others do, hire qualified personnel and give them good remuneration, close their eyes and hope for the best. The result is almost... 

Energy: An Oil & Gas Primer

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The US shale revolution is redrawing the energy map of the world. In 2014 the US replaced Saudi Arabia as the world’s largest producer of oil. The forecaster of such a development 5 years ago would have been taken away by men in white coats. The US has also overtaken Russia as the world’s largest producer of natural gas. This secular growth of this non-OPEC supply source...

Jim Slater

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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.

The first key point is to focus on a relatively narrow area and become very expert in it.

The second and most important thing is to cut losses and run profits. Most people do the opposite – they tend to snatch profits and hug losses. In this way inevitably they end up with big losses and small profits instead of the other way around.

The third point is to concentrate on growth shares with forward price earnings ratios less than their future growth rate.

The fourth point is that I am great believer in the importance of cash flow. I always make sure that EPS are exceeded by cash flow on a regular basis. In this way I eliminate potential Enrons.

BORN Chester, UK 1929.

EDUCATION Slater left grammar school at the age of 16 and became a Chartered Accountant when he was 24.

CAREER Slater spent his first nine years after school in industry, culminating in his appointment as deputy sales director of the Leyland Motor Corporation. After successfully writing an investment column under the pseudonym ‘Capitalist’—the ghost portfolio of ‘Capitalist’ appreciated by 68.9 % against the market average of 3.6 % – in 1964 he launched Slater Walker Securities, which collapsed in the wake of the secondary banking crisis of 1973–75. Slater famously found himself to be a ‘minus millionaire’, owing £1 million more than his assets. Within a few years he repaid all of his debts with interest. In 1976 he started to invest in property and later in the mining industry as well as biotech and agriculture. In early 1990 he devised a public company statistical guide, Company REFS, for investing based on his investment principles. Since 1975 Slater has been a very active stock market investor and remains so today.

INVESTMENT PHILOSOPHY Slater is a small-cap growth stock market investor. The key figure in his investment approach is the price–earnings growth factor (PEG). A PEG of below one, with earnings growth higher than the multiple, is attractive. His approach is similar to Peter Lynch’s, and there is some debate over which of the two devised the PEG. There is, however, no doubt that Slater popularized it in the UK. In addition, Slater demands that a company should show cash flow in excess of earnings and it must have been growing for at least the last three years. Also the company should not be over-geared. His preference for small companies is based on the conviction that ‘elephants don’t gallop’, an expression that he coined. Slater mainly depends for his investments on public data; however, he requires at least three analysts’ forecasts before investing. The management’s behaviour in terms of their buying shares and being optimistic in their annual reports are also important parts of his approach. Slater has a humble attitude to the market and does not attempt to forecast which way it is going at any point in time. He regards running profits and cutting losses as a key factor in successful investment. His investment style is probably one of the most accessible in the book.

OTHER Despite not managing other people’s money, there is a lot of evidence of Slater’s investment strategy being successful. His business column and recommendations over the years have proved to be very profitable. A public fund based entirely on his principles would be up 188 % against the market’s 73 % in the last three years, and 77 % up over the market’s 7 % during the last five years. Slater is first and foremost known in the UK for trying to help the man in the street invest successfully. He has written five investment books as well as thirty books for children. He is still a very active investor and still answers questions about investing on his homepage.

Sources: Jim Slater; www.jimslater.org.uk; MFM Slater Growth Fund.

Primer Accounting Warning Flags

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“At any given time there exists an inventory of undiscovered embezzlement in […] the country’s businesses and banks. This inventory – it should perhaps be called the bezzle – amounts at any moment to many millions of dollars. It also varies in size with the business cycle. In good times people are relaxed, trusting, and money is plentiful. But even though money is plentiful, there...

Software & IT Services Primer

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We have arrived at our concluding and in our view arguably most interesting piece on information technology. Software & Services is the third of the industry groups that constitutes the Information Technology sector. The other two, Technology Hardware & Equipment plus Semiconductors & Semiconductor equipment, have been covered in previous issues of The Companion. Software & Services is further broken up into three industries, namely 1) Software...

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.