Superinvestors: Lessons from the greatest investors in history - from Jesse Livermore to Warren Buffett and beyond

By Matthew Partridge

The ultimate guide to history’s greatest ever investors Superinvestors lays bare the investing secrets of legendary investors - from early 20th-century figures such as Benjamin Graham and John Maynard Keynes, through to more modern names such as Anthony Bolton and Warren Buffett. The investors have been picked for a variety of criteria, including their investing excellence, the different ways in which they have made money - and above all for what they can teach individual investors. A wide range of investment styles are represented, ranging from David Ricardo (who made a fortune by correctly predicting the outcome of the Battle of Waterloo), to the patient value-orientated approach of Warren Buffett. The book also looks at some important innovators, including John Bogle and his development of index funds as a low-cost way of getting exposure to the market, and Edward O. Thorp and his data-driven approach which aims to avoid human emotion. The book looks at each of the investors' careers in depth. This includes their background, the strategies used to beat their peers, and an honest evaluation of their success, using a special star-rating system. Naturally, the main focus is on their best investments. However, sometimes failures can be extremely instructive - so the book also looks at those investments that didn’t quite go to plan. Finally, each chapter concludes by detailing the lessons that ordinary investors can learn from the superinvestor. The result is a treasure trove of success stories, cautionary tales, legendary stock picks and world-beating strategies that will fascinate and inspire investors of every level. Featuring: Jesse Livermore, David Ricardo, George Soros, Michael Steinhardt, Benjamin Graham, Warren Buffett, Anthony Bolton, Neil Woodford, Philip Fisher, T. Rowe Price, Peter Lynch, Nick Train, Georges Doriot, Eugene Kleiner and Tom Perkins, John Templeton, Robert W. Wilson, Edward O. Thorp, John Maynard Keynes, Jack Bogle, Paul Samuelson

• Language: English
• Publisher: Harriman House
• Release date: Jun 26, 2017
• ISBN: 9780857195982

Matthew Partridge

Matthew Partridge is an experienced financial journalist. He writes for MoneyWeek magazine, Britain's biggest-selling personal finance weekly. A trained historian, Matthew did a degree in economics and history at the University of Durham, before doing a master's and a doctorate in economic history at the London School of Economics. He has taught at Goldsmiths, University of London, as well as spending time at various investment banks and a well-known economics consultancy.

Book preview

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Superinvestors

Lessons from the greatest investors in history

From Jesse Livermore to Warren Buffett & beyond

Matthew Partridge

To Bernadette and Tony, my wonderful parents,

for all their support over the years.

Contents

About the Author

Foreword – by Clive Moffatt

Introduction – Opportunities for Ordinary Investors

A world of highly paid coin-flippers?

Greatest investors

Rating the investors

1. Jesse Livermore – The Trend-Following Boy Plunger

A self-made man

From the farm to Wall Street via bucket shops

Reading the tape like a conductor

From rags to riches to rags

The man who brought down the market

Blowing money on other investments

What Livermore’s story teaches us

2. David Ricardo – The Napoleonic Speculator

Introduction

How did he start out?

Taking advantage of hysteria

Small profits add up to a lavish lifestyle

Ricardo’s Waterloo

Difference between investing and speculation

3. George Soros – The Alchemist Who Broke the Bank of England

Feared rather than loved

From immigrant to billionaire

Using reflexivity

Breaking the Bank of England

Mauled by the Russian bear

Lessons from George Soros

4. Michael Steinhardt – The Contrarian Hedge Funder

Introduction

The sociology of the markets

From block trading to variant perception

The not so Nifty Fifty

The trades that didn’t work out

Huge returns

Worthwhile, but difficult

5. Benjamin Graham – The Father of Value Investing

Introduction

Buying value and smoking cigar butts

Graham-Newman Corporation

GEICO

Value matters

6. Warren Buffett – The Elder Statesman of Finance

Introduction

From Omaha to Wall Street

From value to growth

Six decades of success

Picking up where Graham left off

What we can learn from Buffett

7. Anthony Bolton – The British Warren Buffett

Introduction

From stock picker to ‘Silent Assassin’

Three decades of success – both at home and abroad

Bolton’s best calls

Bolton’s turbulent Chinese experience

The importance of value investing

8. Anthony Cross – Investing With an Economic Advantage

9. Philip Fisher – The Inventor of Growth Investing

Introduction

Career break proved a hidden blessing

Finding fast-growing companies

Texas Instruments and Motorola

Companies for all seasons

10. T. Rowe Price – The Pragmatic Growth Investor

Introduction

From chemistry to money management

Growth – but not at any price

Strong track record

High-flying stocks

Other lessons for investors

11. Peter Lynch – The Man Who Beat the Street

Introduction

From the golf course to fund management

Bottom-up investing

Outpacing the bull

Liked the company, bought its shares, made a packet

Growth investing simplified

12. Nick Train – The Inactive Optimist

Introduction

Apprentice becomes the master

Finding value in growth

Buying shares in good-tasting companies

Stocks – and stock markets – for the long run

Exceptional performance

What has worked…

…and what hasn’t

Keeping it simple

13. Georges Doriot – The Venture Capital Pioneer

Introduction

Buying a stake in a business

Short-term problems, long-term success

Doriot’s best investment – Digital Electronic Corporation

Lessons from ARDC

14. Eugene Kleiner and Tom Perkins – The VCs of Silicon Valley

Introduction

The refugee and the executive

Investing in edible dog food

Two big successes

What you can learn from Kleiner Perkins

15. John Templeton – The Global Investor

Introduction

From poker player to star fund manager

Investing abroad – and against the herd

Getting Japan right, wrong and right again

Importance of overseas investing

16. Robert W. Wilson – The Short Seller

Introduction

Putting his investing before his day job

Adding leverage to hedged investments

Turning a nest egg into a large fortune

Success on both the long and short sides

Squeezed in Atlantic City

The eighth wonder of the world

17. Edward O. Thorp – The Revenge of the Quants

Introduction

From blackjack to the stock market

Systematic and scientific investing

High returns, low risk

Other good investments

How to follow in Thorp’s footsteps

18. John Maynard Keynes – The Stockpicking Economist

Introduction

Combining academia and money-making

From asset allocation to stock picking

Mediocre speculator but outstanding stock picker

Mining shares and car companies

Importance of flexibility

19. John ‘Jack’ Bogle – The Founder of Index Investing

Introduction

Poacher turned gamekeeper

Buying the dartboard

First they laugh at you, then they copy you

Does passive investing work?

Depressing or liberating?

20. Paul Samuelson – The Secret Investor

Introduction

Random walk

Commodities Corporation

Private investments

Pretty efficient market

Conclusion – Lessons of the Superinvestors

1. The market can be beaten

2. There are many roads to investment success

3. Be flexible…

4. …but not too flexible

5. Successful investing requires an edge

6. When you do have an edge, bet big

7. Have an exit strategy

8. Ordinary investors have some advantages

9. Big isn’t always beautiful

10. It’s good to have some distance from the crowd

The best superinvestor?

Bibliography

A. Published books

B. Journal articles and working papers

C. Newspaper and magazine articles

D. Other sources

Thanks

Publishing details

About the Author

Matthew Partridge is an experienced financial journalist. He writes for MoneyWeek magazine, Britain’s biggest-selling personal finance weekly. A trained historian, Matthew did a degree in economics and history at the University of Durham, before doing a master’s and a doctorate in economic history at the London School of Economics. He has taught at Goldsmiths, University of London, as well as spending time at various investment banks and a well-known economics consultancy.

Foreword – by Clive Moffatt

It has often been said that the stock market is a discounter of all known information – so what is the point of this new book by Matthew Partridge? Well, it is fun for a start. He investigates and rates the performance and impact of 20 ‘superinvestors’ spanning the last 200 years. If you are a private investor it will show you what can make for success. If you are a professional fund manager it will provide you with useful insights on your rivals and those who came before you – and perhaps get you rating yourself.

The investment market has been transformed in scope and complexity since David Ricardo (who you will meet in chapter 2) speculated successfully on the outcome of the Battle of Waterloo but, according to Matthew, success still requires knowledge, an appetite for risk, good timing and luck. As in other areas of life, it is just as much an art as it is a science.

Since the 2008 global financial meltdown, people have become sceptical about professional fund managers. Matthew captures the mood in a few apt words: the overall message seems to be that it’s difficult to beat the market over the long run and that most investment professionals are nothing more than highly paid coin-flippers.

On the other hand, ultra-low interest rates since 2008 have made it very clear that no one is going to get rich – nor are pension funds going to be able to meet their targets – by simply putting cash in savings accounts. And with cheap money, stock markets have recovered significantly. The challenge facing investors is how to secure an above-average return in rapidly changing global markets.

To that end, Matthew turns the spotlight on a variety of mostly professional investors from past and present, ranging from David Ricardo and Benjamin Graham to Warren Buffett and Anthony Cross. He includes venture capitalists and academics such as John Maynard Keynes and Paul Samuelson. And, of course, the founder of passive investing himself – Jack Bogle. It is a varied but comprehensive list, and rather than simply describe who they are and what they did, Matthew looks closely at their relative performance and impact and – crucially – digs down into what investors today could feasibly adopt from each of them.

He also rates them. To answer critics who might argue that over such a long period one is not comparing like with like, Matthew has avoided using over-elaborate assessment criteria and opted for a simple (and not too serious) hotel-style star-rating system of up to five stars in four categories. To avoid spoiling your enjoyment of the book I will not reveal who wins. I can say that no one gets the maximum score of 20 and that the winner is not the most obvious candidate.

So what can this comparative analysis of elite individual investment performance tell you about the path to successful investment, whether you are a professional fund manager or a private investor?

Most investors and analysts would probably agree with Matthew’s main conclusions:

despite a high level of liquidity, computerisation and the speed of the internet, financial markets are still not perfect and there are profitable anomalies to be discovered

there are many different routes to investment success – and no one silver bullet

it is important to be open-minded and flexible in one’s approach, but patience usually has its own rewards and too much chopping and changing can have negative results

the stock market is a zero-sum game – for every buyer there has to be seller and both believe they are being astute; if you feel you have an edge you should therefore back it to the hilt

many traders live by the motto ‘sell your losers and let your winners run’ but sometimes it pays to buy (or hold) when a price is falling and be ready to buy more later, but whatever the tactic it always pays to have an exit plan.

Based on my own long view of 40 years, I would also offer the following observations, a number of which chime with Matthew’s findings on these 20 all-time top investors:

Timing can be everything. This applies to all forms of investment – not just selling before a fall or trying to work out when a price has bottomed. In venture capital some of the best business plans have missed out on funding because sentiment turned in a matter of days, prompted by some media scare. As Warren Buffett said: the stock market is a device for transferring money from the impatient to the patient.

You can never know too much. Some institutional investors and their advisors get so keen to do a deal that they ignore the need for comprehensive marketing and management due diligence or overlook any negative findings that emerge from such analysis. In the words of Benjamin Graham, investment is most successful when it is businesslike.

Learn to spot brand value. A lot of companies claim to own a brand when in fact what they have is merely some degree of market awareness. Real brands have customers who buy their products or services when others are cheaper or more readily available. Brands generally experience faster than average share price growth with high market rankings (e.g. Apple), leading to significant gains in market share. Experience has shown that brands take years to build but can be destroyed quickly. As Peter Lynch said: stocks are not lottery tickets.

Beware of straight-line forecasting – during the dotcom boom a senior institutional investor said to me that he was sick and tired of reading prospectuses where revenue and profit forecasts were simply extrapolated forward with no kink in the curve. No matter how well-managed, every business has its ups and downs. Again, in the words of Peter Lynch, You get recessions and stock market declines. If you don’t understand that’s going to happen, then you’re not ready – you won’t do well in the markets.

Be suspicious of personality cults. We live in a world of celebrities, not just in entertainment but in business. People are often blinded by the past reputations of company chairpersons and CEOs and will back them to repeat the successes of the past even when analysis suggests it is improbable – or impossible – for them to do so. Vision and good management are a necessary but not sufficient condition for success. But as Benjamin Graham points out, Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.

Beware of market sentiment. When I was broadcasting the Financial Report on BBC Radio 4 back in the 1970s we used to refer vaguely to movements in market sentiment when we were not too sure why an index or particular shares had moved up or down. Following the crowd can sometimes be successful but it is often what is not fashionable that produces the best returns over time. Benjamin Graham said: Investors should purchase stocks like they purchase groceries, not like they purchase perfume.

Boring companies can make you money. When I worked at the Investors Chronicle the companies editor would regularly apply a ‘buy’ recommendation to companies that no one had ever heard of but which were well run and had cash and (despite that) were trading well below net asset value. It pays to look for the anomalies in the market. In the words of Christopher Browne, Value stocks are about as exciting as watching grass grow, but have you ever noticed just how much your grass grows in a week?

It is often said that the modern world of investing is dominated by big, well-resourced funds. Given the size and speed of global financial transactions across integrated markets, the scope for the individual private investor to be active in the market directly rather than simply a passive investor in tracker funds is limited. However, while passive investing is certainly (as Matthew points out) a perfectly legitimate – indeed for some the best – choice, he is an optimist when it comes to the ability of the individual to succeed as an investor.

After reading Superinvestors, I think you will be too.

Clive Moffatt

June 2017

Clive Moffatt has over 40 years of experience as an international business and management consultant. A graduate of LSE (1971), he is a former Treasury economist, merchant banker (Guinness Peat Group), financial editor at the BBC and business editor of Investors Chronicle. His consultancy, Moffatt Associates, was established in 1988.

Introduction – Opportunities for Ordinary Investors

A world of highly paid coin-flippers?

Ever since the global financial crisis, professional money managers have come under the spotlight like never before. The main complaint is that they charge too much yet deliver surprisingly little. The most pessimistic studies suggest that only a handful of active managers manage to beat their respective indices over an extended period. While other studies paint a more sympathetic picture, the overall message seems to be that it’s difficult to beat the market over the long run and that most investment professionals are nothing more than highly paid coin-flippers.

Indeed, the picture seems so bleak that an increasing number of experts think that opting for passive investing, where you put money into low-cost funds that aim to track the stock market, is a no-brainer. This message seems to be getting through to the public, and they have been pulling their money out of active management and putting it into passive funds instead. With many large institutions and pension funds following suit, and regulators making life harder for the remaining managed funds, there is increasing speculation that active investment may be on its way to extinction, aside from a few niche areas.

There’s nothing wrong with passive investing. Indeed, if you don’t have the time to pick shares, and little interest in learning about the stock market, it is probably the best option. Jack Bogle, who launched the world’s first index fund, is rightly regarded as one of the greatest investors in history, and earns a chapter in this book. However, even if the majority of professionals fail to beat their benchmarks, a significant number have added value for their investors, even after taking fees into account. What’s more, a small minority have beaten the market over an extended period by a substantial margin. This proves that it is indeed possible to get more than just the average return.

At the same time the barriers to entry for ordinary investors have tumbled. In the past, the opportunities for investing money were limited, transaction costs were high and the playing field was heavily tilted towards the professionals. Thanks to a combination of online brokerages, changes to the rules and the rise of spread betting, the individual can go head-to-head with the professionals. The rise of equity crowdfunding and peer-to-peer products means that even areas such as venture capital are more accessible than they have ever been, while the rise of the internet has shrunk the world when it comes to investing.

This means investors don’t have to sit back and accept a choice between mediocre fund managers and an index fund,