Francisco Garcia Paramés

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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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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.

John Neff

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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.

Conventional wisdom suggests that, for investors, more information these days is blessing and more competition is a curse. I’d say the opposite is true. Copying with so much information runs the risk of distracting attention from the few variables that really matter. Because sound evaluations call for assembling information in a logical and careful manner, my odds improve, thanks to proliferating numbers of traders motivated by tips and superficial knowledge. By failing to perform rigorous, fundamental analyses of companies, industries, or economic trends, these investors become prospectors who only chase gold where everyone else is already looking. Mutual fund investors who think they can make money by chasing the hottest fund are panning the same overworked streams.

Many circumstances and yardsticks have changed. Companies cited have grown, merged, or, in some cases, closed their doors. Dividend yields are not so lavish nowadays, and erstwhile P/E ratios seem almost quaint. Brief security analyses are not intended as current recommendations, but as testimony to the thought processes that shaped Windsor’s fortunes. Are they still valid? I think so. The relationship of total return to the P/E ratio still governs my investment decisions, and the returns meet my high standards.

If a lesson emerges besides the merits of low P/E ratios, it should be that successful, long-term investment strategies need not rest on a few very risky glamour stocks. The record will show that we painted our canvas using a broad palette. At various times, Windsor owned representatives of all but two industries, and many were revisited more than once. Some payoffs were of the championship variety; others were nothing to be proud of. Now and then, we hit home runs, but our scoring relied chiefly on base hits. To go home winners, that’s all investors need.

BORN Wauseon, Ohio, USA 1931.

EDUCATION Neff graduated summa cum laude with a BA from the University of Toledo in 1955. He obtained his MBA from Case Western Reserve University in 1958.

CAREER Neff started as a securities analyst with the National City Bank of Cleveland 1955. He joined the Wellington Management Co. in 1964, becoming the portfolio manager of the Windsor, Gemini and Qualified Dividend Funds. He retired in 1995 after more than three decades.

INVESTMENT PHILOSOPHY Neff’s investment strategy was in reality a blend of contrarian, growth and value investing. He calls himself a low price–earnings investor. He focused on the least popular stocks, but they needed to have an organic growth in excess of 7 %, yield protection, and be a solid company. Investments were always based on rigorous fundamental analysis, examining both management and the books in detail. Future earnings were everything and he regards ROE (return on equity) as the most important single yardstick of what management has accomplished for shareholders. On average, Neff’s stocks had a P/E ratio that was half that of the rest of the market. The number of holdings was rarely under 100. He was known for his discipline and his long working days, and for being highly knowledgeable about the companies he invested in.

OTHER The Windsor Fund was the best performing mutual fund during his tenure and became the largest fund, closing to new investors in the 1980s. Of the 31 years he managed the fund, he beat the market in 22 years. He was said to take the week’s entire Wall Street Journal copies home for a second read over the weekend.

Sources: John Neff, John Neff on Investing (2001); CFA Institute; Wikipedia.

Robert Maple-Brown

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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.

§  Firstly, I am a ‘value’ investor and I believe that extensive fundamental analysis of each investment is very important.

§  Secondly, although I believe that diversification is important, I believe Australian equity portfolios should only have about thirty individual investments.

§  Thirdly, ‘value’ is not the same as ‘cheap’, and so the industry in which the company operates and the quality of its management are all-important in determining ‘value’.

BORN New South Wales, Australia 1940. Died 2012.

EDUCATION Maple-Brown graduated from the University of New South Wales in 1965 with a degree in Commerce, and become a Chartered Accountant five years later.

CAREER Maple-Brown joined the merchant bank International Pacific Corporation, which later became Rothschild Australia. After being responsible for the investment management division, he left in 1984 to form Maple-Brown Abbott Ltd. aged 44. He was CEO until 2000 and was non-executive chairman until his death.

INVESTMENT PHILOSOPHY Long-term bottom-up value stock picking is probably the best description of Maple-Brown’s investment style. Confident that markets are inherently inefficient, he took advantage of inevitable periods of excess pessimism by buying when valuations were depressed and selling when valuations became extended during periods of excess optimism – a contrarian approach. Maple-Brown’s investments in general had lower price–earnings ratios, lower valuations of book value, stronger balance sheets, and a higher dividend yield than the market.

The focus was on balance sheet strength and by reconciling reported profits with underlying cash flow. He invested in all asset classes, but was famous for his stock market investments and did not back off in case of pushing for changes in management when necessary.

OTHER Maple-Brown’s value-based investment philosophy started the tradition of value investing in the Australian market. Adjusted for having around 20 % in cash on average, the fund has beaten the benchmark substantially since its inception, and currently manages in excess of $9 billion. He had the long-term performance record in managing Australian equity portfolios and balanced funds. Maple-Brown was inspired by Benjamin Graham in the 1960s.

Sources: Robert Maple-Brown; Maple-Brown Abbott Pooled Superannuation Trust; Wikipedia.

Neil Woodford

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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. 


Long term. Taking a long-term view is an increasingly unfashionable approach in today’s environment. In recent years, average holding periods for equities have shortened dramatically, reflecting a trading rather than an investing mentality. For me, investing in a company is an ongoing process: it starts with meeting the management team and undertaking in depth research of the business and typically I will build a holding over a period of time. While clearly things can change, my intention is to be a long-term owner of that company; I am not simply seeking a quick return. Many of the companies that are in my portfolios have been there for more than ten years and they continue to deliver the earnings and dividend growth that attracted me to them at the outset. As I alluded to above, markets can be driven by a number of things, and during those periods stocks can be mispriced for a considerable length of time. We saw this in the late 1990s with the TMT bubble and we have also seen it more recently in the postfinancial crisis period. However, sooner or later, markets return to valuing companies according to their fundamental characteristics, and so maintaining conviction during these times and focusing on the long-term is essential to fully participate in the returns that selected companies can provide.


Valuation. My second key element is fundamentals. Simply put, earnings and dividend growth drive share prices in the long term, and so these are the key metrics on which to focus. Dividends are one of the best ways to gauge the health of a business, as well as providing a good insight into the management’s capital discipline and recognition of shareholder returns. Research also indicates that those companies with the strongest dividend growth provide the best capital returns in the long term. Therefore, a company’s ability to consistently grow its earnings and dividends is a prime consideration in my investment approach. At the same time, a company fulfilling these requirements is not necessarily a good investment. Valuation is critical, and it is where I believe a company’s growth potential is not reflected in its valuation that will I consider investing.

Risk. This brings us to the final core element of my investment approach, which is the management of risk. I have an unconstrained approach within the portfolios that I manage and so I do not view risk as being relative to a benchmark index. To me, risk is the permanent loss of capital, and in that sense I have an absolute return mentality. Risk can never be completely eliminated from equity market investment, but there are steps that can help to reduce it. Understanding risk means understanding the underlying business: what it does, how it earns its profits, and how sustainable are those returns. Gaining this level of insight and knowledge of a company enables me to form an opinion on how that company should be valued. If the conclusion is that the company is undervalued then it represents a lower-risk investment—in other words, valuation is, in itself, an effective risk management tool.

BORN Berkshire, UK 1960.
EDUCATION Woodford holds a BA in Economics and Agricultural Economics from the University of Exeter; he later studied Finance at the London Business School.
CAREER He commenced his investment career in 1981 with the Dominion Insurance Company, and subsequently joined Eagle Star as a fund manager in 1987. One year later he joined Invesco Perpetual as a fund manager in the UK equities team, and is currently the company’s head of investments. He recently announced his departure from Invesco Perpetual to take place in 2014.
INVESTMENT PHILOSOPHY Woodford is a fundamental long-term bottom-up stock market value investor. He invests mainly in the UK. As follows of his extensive description above, his preference is for resilient companies whose growth and earnings he sees as stable, yet are underappreciated by the market. Not surprisingly he shows the best relative performance in turbulent market conditions. Woodford is something of an activist, pressing managers at companies to pursue share buybacks when the intrinsic value of a company well exceeds its share price.
OTHER As head of investments at Invesco Perpetual, Woodford controls over £30 billion of assets. He has been awarded several prizes. His hobbies include wildlife and horses.

Sources: Neil Woodford; Invesco Perpetual High Income Fund; Wikipedia.

Peter Lynch

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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 basic story remains simple and never-ending. Stocks aren’t lottery tickets. There’s a company attached to every share. Companies do better or they do worse. If a company does worse than before, its stock will fall. If a company does better, its stock will rise. If you own good companies that continue to increase their earnings, you’ll do well. Corporate profits are up fifty-five fold since World War II, and the stocks market is up sixtyfold. Four wars, nine recessions, eight presidents, and one impeachment didn’t change that.

You don’t need to make money on every stock you pick. In my experience, six out of ten winners in a portfolio can produce satisfying result. Why is this? Your losses are limited to the amount you invest in each stock (it can’t go lower than zero) while your gains have no absolute limit. All you need for a lifetime of successful investing is a few big winners, and the pluses from those will overwhelm the minuses from the stocks that don’t work out.

Nothing has occurred to shake my conviction that the typical amateur has advantage over the typical professional fund jockey.

BORN Newton, Massachusetts, USA 1944.

EDUCATION Lynch graduated from Boston College in 1965 and took an MBA at the Wharton School of the University of Pennsylvania in 1968.

CAREER Lynch started as an intern with Fidelity Investments in 1966, partly because he had been caddying for Fidelity’s president, became an analyst, and in 1974 director of research. In 1977, Lynch was named head of the then small and obscure Magellan Fund. Lynch resigned as a fund manager in 1990 to spend more time with his family. Lynch has since taken different positions in Fidelity. At present he is vice chairman.

INVESTMENT PHILOSOPHY Lynch is one of history’s most illustrious growth-oriented stock investors. Lynch has invented several new approaches to investing. His most famous investment principle is simply ‘Invest in what you know’, popularizing the economic concept of ‘local knowledge’ – investors learn more from visiting the local grocery shop than staring at charts. Another key innovation was PEG (price–earnings ratio compared to growth). Lynch is also considered one of the foremost advocates of GARP (growth at reasonable price), but in well-managed companies with sound balance sheets. He does not care about liquidity in the stock, and prefers small and mid-size companies. He also favors turnaround cases and asset plays. Overall he has a very flexible investment strategy, to the extent of being known as ‘The Chameleon’. Companies, which invest in luxury head offices at the cost of returns to shareholders, are never admitted to the portfolio.

OTHER Outperforming the benchmark by over 13 percentage points in 13 years without leverage is probably a record for a mutual fund, especially when value stock performed better than growth stock during the period, and Lynch didn’t invest in tech stocks such as Microsoft and Cisco, which were two of the best performing stocks in the market. The Magellan Fund increased from $18 million to $14 billion during his management. When he resigned, Magellan had more than 1,000 individual positions. Lynch recommends investors to stay in the stock market even when times are bad, as the risk of missing the next rally is worse. The only time to prefer other investments is when bonds give more than 6 % higher interest than dividend yield. Lynch is also the inventor of ‘ten-baggers’–companies whose value increases tenfold. When managing the fund he read 700 annual reports yearly. He has written three books. Since his retirement, he has been an active participant in a variety of philanthropic endeavors.

Sources: Peter Lynch, One up on Wall Street (2000); Fidelity Investments; Magellan Fund; Investopedia.