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  • Writer's pictureSahastha

Investment Principles of Most Successful Investors

Updated: Oct 4, 2023

When it comes to the world of investments, every successful investor has their own well defined investment principles and strategies. Their investment principles inspired many generations of investors and continue to do so, the popular names which come into our mind are Warren buffet, Benjamin Graham, John Templeton etc. Here we will discuss those successful investors and how they have managed risks, created new methods of investing.

The Investing Style of John Templeton

No matter how careful you are, no one can predict the future, not able to control it accurately. For example, the stock market may be reaching new highs, while at the same time the economy is tanking. Under these conditions, it is quite difficult to decide the entry and exit points of the market. Templeton principle is to buy a well-managed company stock at below their fair value with a diversified portfolio by industry, by different asset class, and by geographically. The investment principle of John Templeton can be buying bargain priced good quality stocks and he would then subsequently sell down his holdings as their stock prices became increasingly overvalued. His value investing approach concentrated on undervalued stocks of well managed companies. John Templeton had a contrarian view and he searched for fundamentally sound companies where the low stock price would likely be temporary. Templeton does not recommend investing because of bull markets or bear markets, rumors are no longer accepted and ultimately investors recognize the true value of the asset.

As we know the cyclic nature of the market, to take an opportunity out of this, John Templeton would rotate the investments according to the current economic and business conditions.

Benjamin Graham investment principles

Benjamin Graham was an investor, economist, and known as the father of value investing, well known for his book “The Intelligent Investor”. He lost most of his money in the stock market crash of 1929, those experiences taught Graham lessons about minimizing downside risk by investing in high return potential companies whose shares traded far below the liquidation value of companies. He doesn’t invest in popular companies if those companies are fundamentally not strong, also ignores the herd or crowd in the market, always buy/sell at the right time with good fundamental research.

For Graham, in the short-term, the stock market acts like a voting machine, and in the long term, the stock market acts like a weighing machine, we will see the actual value of assets in the long run. Before investing, one should carefully examine the intrinsic value, when opportunities are identified, investors should make a purchase. Invest with sufficient guarantees, margin of safety, and get decent returns (more than very safe debt instruments like bonds).

“The Intelligent Investor” – advises investors to hold a portfolio of stocks and also some amount in cash to take advantage of market fluctuations, to avoid buying stocks simply when they are attractive, and to look out for ways that companies may be manipulating value/prices. Some ratios are important to look out the debt to current asset ratio, current ratio, earnings per share, P/E, P/BV, and dividends.

Investment methods of Warren Edward Buffett

Warren Buffett is one of the most successful investors and is the CEO of Berkshire Hathaway. Berkshire Hathaway has produced an annual return of 20% since 1965, it has beaten the S&P 500.

Buffett’s basic investment principle is: “Never invest in anything that you don’t understand properly”.

He looks into whether the companies that he invests in are under his circle of competence, investing in those companies only after he understands the business fully. Hence, deep dive into the industry, its workings, relationship or dependence on global or economic factors along with the company’s background (including the credibility and stability of the internal management). A prime example of this was, Mr. Buffett did not invest in technological companies during the massive boom in 1990.

Understanding the main drivers of the business and how the business generates profit is a key point in investing. If the business model of a company is too complicated or if an accurate prediction is needed to decide on whether the company is a good buy or not, an investor should look for another investment.

Buffett believes in the buy and hold investment strategy. One should invest in an undervalued stock of a company with strong fundamentals, the stock price will eventually increase over a period of time. In the short run, stock prices might change as per the market fluctuations. But stock value will increase exponentially as the investor holds the stock for a long horizon.

Before he wants to invest in a particular company, he looks into the financial statements, Economic and financial moats of that company. At the same time, Mr. Buffett does not invest in Initial Public Offerings (IPOs) and invests in those companies with public domain for at least 10 years. Mr. Buffett has also invested in Paytm in 2018 with $356 million. Berkshire Hathaway investment holdings are American Express, Apple, Bank of America, Bank of New York Mellon, Charter Communications, Coca-Cola, General Motors, Moody’s Corp, and U.S. Bancorp etc.

Conclusion:

There is a lot to learn from successful investors and their experiences. Each of these investors have a different set of investment principles and strategies for managing investments. These principles could give an idea on how to approach. One strategy that works for you might not work for another. The best strategy is the one that suits your requirements and objectives.

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