Tags: Buffett | Graham | Lynch | stock

Telegraph: History's Top Investors Shared Their Stock Secrets

By    |   Monday, 03 February 2014 07:50 AM

Finding good stocks to invest in might actually be easier than you think.

The Telegraph looked at the investment performance of some of the greatest American stock pickers of all time — including Peter Lynch, Ben Graham and Warren Buffett — and extracted some pearls of wisdom for the average investor.

Peter Lynch, who logged 29 percent annual growth in running the Fidelity Magellan Fund from 1977 to 1990, famously advised investors to invest in stocks of companies that they know something about.

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"Apple computer — my kids had one at home, and then the systems manager bought several for the office," he once said "Dunkin Donuts — I loved the coffee."

As a top executive at one of the largest mutual fund companies in the United States, Lynch had access to a mountain of research data and analysis. But he believed that personal knowledge of a stock's products or services could give him a leg up.

Ben Graham, who began his Wall Street career in 1914, is considered the first investor to take a scientific approach to stock selection, the Telegraph reported.

After sustaining losses in the 1929 stock market crash, Graham began to look for stocks with prices that offered a "margin of safety" — where the value of the company's assets as measured in their financial reports exceeds their stock market valuation.

When Graham taught at Columbia University, Graham was a contrarian, like his student Warren Buffett. (Buffett later called Graham "the best teacher in the history of finance.")

"Buy when most people, including experts, are pessimistic, and sell when they are actively optimistic," Graham once advised.

It is estimated Graham accomplished stock returns of approximately 20 percent annually during his career, the Telegraph said.

As for Buffett himself, he is certainly regarded a value investor like Graham, but he also practices a "buy and hold" strategy. For instance, Buffett has remained invested in American Express and Coca-Cola for many years, and both companies' stocks have produced big cumulative returns.

Buffett also prefers companies that plow their profits back into their businesses. His Berkshire Hathaway holding company generated average annual returns of 19.7 percent annually from 1965 through 2012.

Buffett's advice for investors: "Only buy something that you'd be perfectly happy to hold if the market shut down for 10 years."

Recent research by the National Bureau of Economic Research (NBER) sheds new light on Buffett's stock-picking ability. The chairman and CEO of Berkshire Hathaway is well known for his ability as a value investor, but his use of leverage is hardly mentioned. The NBER researchers estimate Buffett's leverage is about 1.6 to 1 on average.

"Buffett’s returns appear to be neither luck nor magic, but, rather, reward for the use of leverage combined with a focus on cheap, safe, quality stocks," they wrote in the paper "Buffett's Alpha."

The research means ordinary investors will have a hard time matching Buffett's returns. They may be able to pick good value stocks with growth prospects, but they probably can't borrow as cheaply as Berkshire Hathaway, writes Sam Ro for Business Insider.

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Finding good stocks to invest in might actually be easier than you think.
Monday, 03 February 2014 07:50 AM
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