The best way to learn something is to copy those at the top of their game. Matthew Partridge looks at what we can all learn from the greatest investors and their most legendary trades.
Any teacher or instructor will tell you that a great way to learn a new skill is to watch what the experts do and try to apply their techniques. But while few of us can ever hope to emulate Andy Murray or Harry Kane fully, there's nothing stopping the ordinary investor from trying to emulate the legends of investment. For the last nine months I've been writing a book called Superinvestors, which looks at the careers of 20 legendary investors and traders. Here are ten of the most important and instructive trades and what you can learn from them.
1. David Ricardo (1815)
Buy when there is blood on the streets
David Ricardo is mainly remembered for his writings on economics, but he was also a very successful bond trader. During the Napoleonic Wars of 1805-1815, he led several syndicates that invested in the bonds that funded the defence of the realm. However, his greatest moment came in the days leading up the Battle of Waterloo.
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Just before the battle, Ricardo invested a large part of his fortune in a government bond issue. Unlike his friends, he not only held on to the loan, but also increased his position in the days following this battle, taking advantage of a dip in prices caused by a counter-rumour of a French victory. Speculation that he had insider knowledge, or even spread rumours of a British defeat, is probably exaggerated. Ricardo later said that he "had been a considerable gainer by the loan", with his obituary suggesting that he had made £1m, a huge fortune at that time.
Lesson: Markets can overreact to events. Buying when everyone is panicking and prices are irrationally depressed can be very profitable.
2. Jesse Livermore (1929)
Making millions from the Wall Street Crash
Jesse Livermore's story is a classic "rags to riches" tale. Leaving home at the age of 14 with $5 in his pocket, he made his first fortune trading shares in "bucket shops", gambling halls where you could bet on changes in the prices of shares. His technique relied on his exceptional skills at spotting patterns in stock prices, and his grasp of market sentiment.
In the summer of 1929 Livermore believed that the bull market was running out of steam, and noticed that an increasing number of retail investors were buying on credit, leaving them exposed to a fall in prices. He initially shorted small amounts of key shares, to see how the market would react, then became much more aggressive after he eventually started making money. The Wall Street Crash that October swelled his fortune to an estimated $100m, although he would also receive death threats from those who accused him of causing the collapse.
Lesson: Making profits from shorting is hard, as prices generally rise over time. Starting with small positions and scaling them up is a wise strategy.
3. Benjamin Graham (1948)
Be flexible enough to break your own rules
Benjamin Graham championed value investing, which is the idea of buying companies that are trading at very low multiples of earnings, or at a discount to the value of their net assets.He mentored several other investment legends, including Irving Kahn and Warren Buffett, and wrote investment classics The Intelligent Investor and Security Analysis. Yet one of his most profitable investments broke some of his own rules.
Geico was a fledgling company that specialised in selling insurance to government employees. In 1948 the owner decided to sell his shares in the company at a time when the sector was unpopular due to high inflation, enabling Graham's hedge fund, the Graham-Newman Partnership, to buy the shares cheaply.
However, Graham realised that Geico's use of mail order and its customer base gave it a competitive advantage and considerable growth potential, so he held on to the shares even after they had risen and no longer looked cheap by value-investing standards. Between 1948 and 1956 alone, Geico's shares rose tenfold, making it Graham-Newman's most profitable investment.
Lesson: While it's generally a good idea to stick to your strategy, it's also wise to be flexible if the opportunity is compelling enough.
4. Philip Fisher (1955)
Great companies may seem expensive
If Graham is the father of value investing, Philip Fisher has the same status among growth investors. His book Common Stocks and Uncommon Profits urged investors to focus on high-quality and well-run companies in fast-growing industries. Fisher's best investment, which he started buying in 1955, and consistently tipped throughout his career, was the semiconductor company Texas Instruments (TI).
While many brokers felt that it was too expensive, he believed that the industry had huge growth potential and felt that TI's status as the lowest-cost producer would help it flourish. His optimism proved correct: when the share price peaked in 2000, a year after Fisher's retirement, it had increased by more than 1,500 times its level in 1956.
Lesson: It's difficult to find a company that can consistently grow its sales over a long period of time. If you can find such a firm you should hold on to it.
5. John Templeton (1964)
Venture abroad for more opportunities
British fund managers have been investing overseas since the 19th century, but American investors have often been more parochial. One of the first to break the taboo around investing internationally was John Templeton, who set up an internationally focused mutual fund in 1954. He discovered that Japanese firms' true profits were vastly understated, so they were cheaper than they appeared, while the Japanese economy was also expanding at a tremendous rate and was politically stable.
When Japan finally removed capital controls in the late 1960s, Templeton moved a great deal of the fund's money into the country, helping him take advantage of a huge run-up in the value of the Nikkei stock index between 1968 and 1980. However, when Japanese shares became extremely expensive in the mid-to-late 1980s, he sold all his Japanese holdings, protecting him from the bursting of the bubble.
Lesson: Investing internationally is an excellent way to find new opportunities and to diversify. Local knowledge can also help you greatly.
6. Paul Samuelson (1970)
A Nobel laureate learns from Warren Buffett
As well as a glittering academic career that saw him win the Nobel Prize for economics, Paul Samuelson made a big (and controversial) contribution to the world of investing by developing the "efficient-market hypothesis". This argues that active investing is useless because all information is disseminated quickly and reflected in stock prices a theory that inspired Jack Bogle to create Vanguard and set up the first public passive investment fund.
However, Samuelson's most successful personal investment was in Berkshire Hathaway, Warren Buffett's investment firm. After testifying to US Congress that most fund managers were a waste of money, Samuelson received an angry letter from Conrad Taff who, like Buffett, had studied with Benjamin Graham, arguing that Buffett's success disproved the efficient-market hypothesis.
Instead of throwing the letter in the bin, as many people would have done, Samuelson did his own research and started buying shares in Berkshire Hathaway. Between 1970 and Samuelson's death in 2009, each $1,000 invested in its stock would have become $2.12m, an annual return of more than 20%.
Lesson: It's important to keep an open mind and read information and opinions that challenge your own views.
7. Peter Lynch (1971)
Investing from everyday experience
Between 1977 and 1990, Peter Lynch ran Fidelity's Magellan mutual fund, producing average returns of just under 30% a year. He often claimed that ordinary investors could gain an advantage over the professionals by applying direct knowledge of a company's goods and services. In practice, he combined this "buy what you know" approach with a huge amount of more traditional research and company meetings.
Early in his career Lynch discovered the clothing firm Hanes, after his wife commentated favourably on L'eggs, a brand of tights that Hanes was trialling in convenience stores. So he persuaded Fidelity to buy it. When a competitor came out with a rival product, Lynch asked his wife to test the competitor's offering, and held onto Hanes after she reported that it was inferior. By the time Hanes was taken over, its share price had gone up sixfold.
Lesson: You can learn at lot about a company's potential by looking at the quality of its products, although you also need to do in-depth research.
8. Eugene Kleiner and Tom Perkins (1976)
Look for the big winners
The 1970s saw the birth of the venture-capital industry. One of the most influential companies was Kleiner Perkins (now Kleiner Perkins Caufield & Byers), which provided the template that many of its competitors still follow. Its most famous early success was biotechnology pioneer Genentech, which was founded in 1976 with the goal of using genetic engineering to produce human insulin and other medical therapies. Kleiner Perkins initially invested a total of $200,000.
By the time Genentech was floated four years later the value of the shares had rocketed to $32.5m, and by 1986 it was worth $160m ($346m in today's money). The value of Kleiner's first fund, which held 17 investments, increased from $7.46m in 1973 to $345.56m in 1986 but nearly 95% came from Genentech and one other stock, Tandem Computers.
Lesson: In technology most of your gains will come from a small number of investments but it's hard to tell what they will be, so diversify.
9. George Soros (1992)
The man who broke the Bank of England
George Soros is perhaps the most well-known hedge-fund manager in history. Between 1969 and 2011 his Quantum Fund produced an average return of around 20%. His most controversial trade was a giant bet against sterling in the early 1990s. In 1990 Britain joined the European exchange rate mechanism (ERM), which fixed the value of sterling against various other European currencies.
Soros believed that the pound was overvalued, that the British economy was unable to withstand further interest-rate rises required to maintain its value, and hence that Britain would have to leave the ERM. He also concluded that once the financial markets lost confidence in Britain's commitment to the ERM, they would start selling pounds, which would rapidly force sterling out. Soros took a large short position against sterling totalling $10bn, the pound was forced out of the ERM in September 1992 and Quantum made $2bn in the immediate aftermath.
Lesson: Market perceptions of what is about to happen can have real-world impacts, turning them into a self-fulfilling prophecy.
10. Neil Woodford (2000):
Buying shunned stocks
Neil Woodford is regarded as Britain's leading value investor. From 1988 until 2014 he ran Invesco's High Income Fund, which returned 13.2% per year, significantly higher than the 9.3% thatthe FTSE All-Share returned during the same period.
In 2000 Woodford invested heavily in tobacco shares, realising that a settlement compelling them to pay the US government billions of dollars ensured the government had a stake in their continued survival. He also grasped that emerging-market growth would more than compensate for falling sales elsewhere. Over the next 14 years British American Tobacco (BAT) delivered an annual return of more than 20% a year, included dividends.
Lesson: Some of the best investment opportunities can come from companies and industries that have fallen out of favour, so don't ignore these stocks.
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