John Reese is chief executive of Validea.com and Validea Capital, the manager of an actively managed ETF. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service.
Anyone looking for advice or a guidepost on investing would reasonably look to people who have hit on some big-time success. But billionaires aren’t always the best role models for regular people.
For example, George Soros made fame and fortune by making bold, large bets on currencies, most notoriously the British pound, but currency trading on a grand scale isn’t for everyone.
Likewise, Carl Icahn made his billions buying beaten down stocks in large quantities and pushing the boards and managements of those companies to make changes, with the goal of boosting the share price. Most ordinary investors don’t have the wherewithal to become an activist like that.
Then there is Warren Buffett, a long-time value investor who likes to own stakes in iconic American brands such as Coca-Cola Co. and Apple Inc. His style is perhaps more accessible to the masses. The basic strategy he has used for decades is to find undervalued stocks of companies that have good management and solid competitive positions and hold them for the long term.
But billionaires, of course, have vast resources to devote to making unique investments, and their circumstances shouldn’t be compared one-to-one with each other or with anyone else. Ben Carlson from Ritholtz Wealth Management made this point in a recent post. Investors should focus on their own circumstances, ability to tolerate risk and goals when they are setting up their own plans, and forget about what others are doing.
This approach accomplishes a few things. First, it helps you as an investor to resist the temptation to follow the herd, which can mean paying too much for a stock while overlooking some great values.
It also means you have a better chance of sticking to your strategy since you were the one who designed it in the first place, rather than simply trying to shoehorn your way into a one-fits-all style.
That isn’t to completely dismiss the experience billionaires bring to the table, though. There are some lessons to be learned from them, broadly speaking.
One of Mr. Buffett’s favourite phrases is “be greedy when others are fearful and fearful when others are greedy.” In other words, the bargain hunting is the best when investors are fleeing the market. This was especially good advice in the spring of 2009, when investors were dumping stocks in the aftermath of the financial crisis.
Mr. Buffett put his own money on the line to lead by example, taking stakes in Goldman Sachs and, later, Bank of America, that have since netted him billions.
On the flip side of that saying, Mr. Buffett resists buying at elevated prices just to buy things. Berkshire Hathaway has amassed a US$100-billion cash pile over the past few years for just that reason. Mr. Buffett has had a hard time finding companies valued attractively enough to buy. His recent solution to that problem is to buy back Berkshire’s own shares.
But what Mr. Buffett would also advise investors to do is avoid trying to time the market. People tend to wait too long when prices are low, afraid to lose money in a down market when that’s when a lot of the opportunity comes in. And they are too quick to jump into hot stocks, risking overpaying for an investment that could be about to give back some of its gains.
He and another guru, Peter Lynch, the legendary former manager of the Fidelity Magellan mutual fund, have also advised people to buy stocks in companies they want to own. Stocks they can relate to because the company makes a product they like. That’s the way to remain a committed, long-term investor.
If there is one trait the ordinary investor can borrow from the billionaire playbook, it’s patience. Here are three stocks that score highly on a model portfolio of stocks built in the style of a patient investor.
J.B. Hunt Transport Services Inc. (JBHT-Nasdaq) – a transportation, delivery and logistics provider in North America. The stock scores highly on our models tracking the styles of Mr. Buffett and Mr. Lynch, with long-term predictable earnings per share and consistently higher returns on equity.
National Beverage Corp. (FIZZ-Nasdaq) – The maker of the popular LaCroix line of sparkling fruit-flavoured water scores well on the same models. The average expected return for the stock is 17 per cent for the next decade.
Biogen Inc. (BIIB-Nasdaq) – This pharmaceutical stock has been on a great ride but still scores highly on the models tracking value and growth investors, indicating it could still have room to run.
John Reese