The Wisdom of Great Investors

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The Science of Hitting
Feb 29, 2012
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On the Davis Funds website, there is an informative page entitled “The Wisdom of Great Investors” (link here). As noted in the introduction, the “wisdom” was extracted by studying the timeless principles of some of history’s greatest investors, including Warren Buffett , Ben Graham, Peter Lynch and Shelby Davis. Here’s the list of those timeless principles, with a bit of my personal commentary:


Avoid Self-Destructive Investor Behavior – In my mind, self-destructive behavior falls into three key categories: inability to act unemotionally, disregard for price, and a lack of patience. To avoid this behavior, one must be able to conservatively estimate a company’s intrinsic value and avoid buying securities when they are materially above that level.


Understand That Crises Are Inevitable – The future is always uncertain, even if people don’t recognize it. Yet, despite crises from time to time, equity investments (particularly in great companies) have proven to be fruitful in the long run. For the investor, crises will undoubtedly pop up from time to time; those looking to attain long-term financial success must not let short-term noise deter them from staying invested in businesses with solid long-term prospects and sustainable competitive advantages.


Historically, Periods of Low Returns for Stocks Have Been Followed by Periods of Higher ReturnsWarren Buffett put it best: “Be fearful when others (the crowd) are greedy and greedy when others are fearful.”


Don’t Attempt to Time the Market – Retail investors continue to disregard this advice and pay the price for their self-deception; as pointed out in the research, the average stock fund returned nearly 10% per annum from 1991-2010, while the average stock fund investor racked up less than 4% a year…


Don’t Let Emotions Guide Your Investment Decisions – Ben Graham put it best: “Individuals who cannot master their emotions are ill-suited to profit from the investment process.”


Understand That Short-Term Underperformance Is Inevitable – This idea is backed by striking empirical evidence based on the returns of 192 large-cap managers from 2001-2010. For those managers finishing in the top 25% among their peers, periods of short-term underperformance were the rule rather than the exception; 62% were among the bottom 25% for at least one three-year period, and nearly one-third were in the bottom 10% for at least one three-year period. The same idea applies for companies as well; don’t simply look at short-term returns as an indicator of whether or not a company is an attractive investment (an argument I’ve heard countless times against MSFT).


Disregard Short-Term Forecasts & Predictions – Not only do they often prove to be misguided (the future is uncertain), but short-term forecasts and predictions have little/no impact on long-term portfolio returns, which should be the focus of the significant majority of investors; more importantly, they can do material damage to hard-earned capital, which can have a disastrous impact on the ability to compound one’s money over time.


At the end of the day, these investment philosophies can be summed up as so: “A disciplined, patient, unemotional investment approach is required to reach your long-term financial goals”. The intelligent investor would be wise to replicate and implement the wisdom left by these great investors within their own investment strategies.
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