Thursday Trivia – Fundamental Principles of Investment by great investment GURUs

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Thursday Trivia – Fundamental Principles of Investment by great investment GURUs

In our view it pays to learn the fundamental principles followed by successful investors. Rather than trying to take tips or follow noise on media, we have an opportunity to read and learn from successful investors. In this view please read below the principles of some of the greatest investors. These are excerpts from a table book by Value research.

Benjamin Graham– Graham based his studies on the earnings yield (inverse of the P/E ratio) and the ratio of stockholders’ equity. The margin of safety, another concept played a big role.  The margin of safety means that the investor should analyze a company’s financials and come up with the intrinsic value. He should buy only when the stock traded at a discount to this intrinsic value. Graham called this the margin of safety. It’s like buying a dollar for 50 cents.

Walter Schloss – Schloss’s starting point was to look for the companies below the book value and with little debt. He would be interested only in companies that engaged in manufacturing of some sort. He was not comfortable with the service industry and would even ignore such successful franchises as MacDonald’s restaurants. He was interested in companies in basic industries.

Joel Greenblat– Greenblatt stresses discipline and his research shows that while beating the market is hard, it doesn’t have to be complicated. The hard part comes not in developing a complex strategy but instead finding a proven approach and sticking to it through good and bad times.

John Neff– He called himself a “low price earning investor’. He searches for stocks that are cheap in relation to their total return (which is defined as the ratio of the sum of their earnings growth plus their dividend yield to the P/E ratio). Absent stunning growth rates, low P/E stocks can capture the wonders of P/E expansion with less risk than skittish growth stocks. In them lies true value.

Peter Lynch– Invest in what you know. An individual investor is more capable of making money from stocks than a fund manager because he is able to spot good investments in his day to day life before Wall Street. This is his natural edge. Since most people tend to become expert in certain fields, applying this basic principle helps individual investors find good undervalued stocks.

Our take – Investing like any other business is successful because of the personal traits of the investor. One needs to examine his own belief system, learn and unlearn from others and his own experiences. Investing is much more than following tips by people or trying to catch a trend by listening to media. It’s an art and science of creating wealth. Please write back your comments and feedback.


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