The Investment U e-Letter: Issue # 685
Monday, June 18, 2007 The World's Best Investment Philosophy
by Alexander Green, Chairman, Investment U; Investment Director, The Oxford Club In her book Philosophy: Who Needs It, Ayn Rand argues that all of us have a philosophy of life. It's just that your philosophy is either conscious, explicit, rational and practical… or unconscious, random, unidentified and, therefore, impractical. It was her conviction that without a philosophy based on evidence and reason, you are inevitably led to "unwarranted conclusions, false generalizations, undefined contradictions, and unidentified wishes integrated by our subconscious into a kind of mongrel philosophy, and fused into self-doubt." Sounds pretty grim. On the other hand, it's probably true. In investing - as in life - it's best to know what you believe and how you know it to be true. But then, there are so many philosophies of investing, which one do you choose? That was the question I asked myself when I entered the money management business back in 1985. The people I worked with were a good bunch of guys. They seemed smart and articulate. And they clearly knew more than me, since I was only just starting out. But after I'd lost a small fortune trading my firm's "strong buy" recommendations, I asked myself a simple question. Instead of listening to the people around me, why don't I simply adopt the investment philosophy of the world's best investors? At the time they were Peter Lynch (who was running the Fidelity Magellan Fund), John Templeton (who was running the Templeton Growth Fund) and Warren Buffett (who was running - as he is today - Berkshire Hathaway). These men didn't need PR agents. Their audited track records spoke for themselves. So I began eagerly reading everything about them that I could find. Fortunately, this wasn't too tough, since the financial press covered them like they lived on Mt. Olympus. They were also putting out plenty of stuff of their own to read. Fidelity Investments, for example, was more than happy to send me brochures explaining Lynch's investment approach - and listing his current Magellan holdings as of the most recent quarter. The Templeton organization was the same, only better. It regularly sent me not only updates on the Templeton Growth Fund, but also cassette tapes of John Templeton addressing investors on his approach to the markets. I listened to these tapes over and over again in my car. I still remember one colleague riding with me, clearly uninterested in hearing John Templeton drone on about his investment principles any longer. In frustration, he finally asked, "Hey, man, you got any Jimmy Buffett?" "I've got some Warren Buffett," I answered. "No," he responded sourly. "Jimmy Buffett." "Sorry." In addition to the treasure trove I received on Lynch and Templeton from their respective fund companies, there was a wealth of information available in Buffett's annual letters to Berkshire shareholders, something I still enjoy reading each year. These folksy, easy-to-read letters are chock full of investment insights. It was hard for me to believe that the master himself was laying out his investment philosophy for anyone to read. Best of all, it was free. All I had to do was call Berkshire and request an annual report. Today, of course, you can access these reports online in about two seconds. These are still some of the best and most accessible pieces ever written on the principles of investing. They helped form the foundation of much of what I found useful in managing money. And the insights they contain are timeless. Eventually, I learned that Buffett, Lynch and Templeton approached the market in very different ways. Yet it was the similarities in their strategies that helped form my own investment philosophy, and by extension the philosophy of the The Oxford Club, whose investment portfolios I direct. (Warren Buffett, in fact, is still a charter member of our Oxford All-Star Portfolio, an elite group of investment selections based on the world's undisputed money masters.) How about you… do you have an investment philosophy? And is it battle-tested to work in good markets and bad? If not, take the time to start developing one - or team up with someone who already has. As Buffett himself famously said, "It's only when the tide goes out that you learn who's been swimming naked." Good Investing, Alex Editor's Note: The Hulbert Financial Digest recently ranked Alex the 3rd best stock picker in the country, based on his 5-year total return. Here's what he's recommending now. Today's Investment U Crib Sheet - As an investor, uncertainty will always be your companion - market risk is constant. So instead of guessing the market's future actions, focus on your own… and follow the investment formula that won Dr. Harold Markowitz the Nobel Prize in finance in 1990. In our special report, Secrets of the Masters, we've explained Harry Markowitz's winning philosophy in detail, and the portfolio that tracks it. You'll also get opportunities from John Templeton, Jeremy Grantham, Jim Rogers, Dennis Gartman and "bond king" Bill Gross. In all, there are 31 opportunities. Here's a rundown.
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