In the third of a new series for SBM Frederik Vanhaverbeke, author of Excess Returns: A comparative study of the methods of the world’s greatest investors, looks at how some of the world’s greatest investors are so successful.
A man with no special pipeline of information will study the economic facts of a situation and will act coldly on that basis. Give the same man inside information and he feels himself so much smarter than other people that he will disregard the most evident facts.
Next in my series that discusses some of the top investors featured in my book Excess Returns: a Comparative Study of the Methods of the World’s Greatest Investors we now look into a famous investor of the first half of the 20th century: Bernard Baruch. Although he was maybe not a value investor pur sang (e.g., he also speculated in sugar), his advice on stock investing is definitely invaluable.
Baruch’s first piece of advice to those new to the investment world is that they should never delude themselves that making money on Wall Street is easy.
Beating other investors at their game can only be done through some kind of edge. And this edge can only be fostered by having a deeper knowledge about one’s stocks than other market participants. In his words, “In no field is the old maxim more valid – that a little knowledge is a dangerous thing – than in investing.”
In order to acquire a deeper level of knowledge Baruch advocated full dedication to the investment process, a focus on the fields one knows best (i.e., focus on one’s circle of competence), a focused portfolio (i.e., limiting the number of stocks in one’s portfolio), and independence (i.e., doing one’s own due diligence without influence from others).
Although many people would like to believe otherwise, Baruch warned that there are no shortcuts on Wall Street. He warned against tips because most tipsters (e.g., friends, family, shoeshine boys) know only the hot stories (and seldom the cold economic figures) of stocks. He even warned that acting on so-called inside information is dangerous because insiders often don’t look at the facts in an unbiased way.
The most valuable lessons from Baruch are probably related to investment intelligence.
According to Baruch, intelligent investors accept with equanimity the fact that they are often wrong. They are not overconfident and don’t try, for example, to pick tops and bottoms. Intelligent investors focus first and foremost on the investment process, and look only in the second place at the results.
Indeed, the worst that can happen to an amateur investor is to make a lot of money through an investment approach that offers no edge in the market, as this may prompt him/her to plunge even deeper in the market (with possibly disastrous consequences further down the road). Also, intelligent investors have the courage to act on their convictions, even if these actions feel uncomfortable.
Finally, Baruch stressed the importance of detached reflection. During difficult times in the market he protected himself against a loss of discipline by constantly reminding himself of the basic principles of investing. Likewise, whenever he lost money he performed a root cause analysis to avoid repeating the mistake.
The lessons from Bernard Baruch are not that much different from the advice of numerous other top investors over the last fifty to hundred years as described in my book. Knowing that his advice comes from another era is reassuring as it illustrates that these recommendations are timeless and will remain valid for many decades to come.
The next article of my series returns to the present and discusses the view on investing of the business partner of Warren Buffett: Charlie Munger.