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Little
minds are interested in the extraordinary;
great
minds in the commonplace. -
Elbert Hubbard
All
of us have heard the expression that experience is the best teacher.
Like many old expressions, you must be careful how you
interpret its meaning. In
reality, the best way to learn is by observing the past successes and failures
of others. Our own
lifetime is limited. By
utilizing the knowledge gained by others, we can determine the
financial strategies most likely to succeed without wasting the time
and effort required by our own trial and error experiences.
A
logical place to start our observations is to review the investment
guidelines used by some of the most successful stock market
investors of all time. Their
guiding principles, based on decades of experience, should be
thoroughly tested against most of the conditions any stock market
investor is likely to encounter.
The following brief biographical sketches summarize the wisdom
provided by five super successful stock investors:
Benjamin Graham, 1894 - 1976. Benjamin Graham, considered one of the fathers of modern stock
market investing, achieved a 17 percent average annual return on his
stock market investments from 1929 to 1956. This is
extraordinary, considering that the time period from 1929 to 1945
included the 1929 stock market crash and the Great Depression, and
represented one of the most difficult time periods in economic history
to make money in the stock market. Graham argued that the distinction between investment and
speculation was an important one that was often misused by financial
professionals. Graham
felt that investors should concentrate on the task of locating the
stock of companies with sound financial standing that was priced well
below the value of the company, irregardless of the general outlook of
the economy or the stock market.
By applying these principles to select a diversified group of
stocks and by maintaining a long-term approach, the investor separated
himself from the speculator and would eventually be rewarded.
Warren Buffett, 1930 to present. Warren Buffett is probably the most successful stock investor
of all time. Solely due
to his stock picking abilities, on any given day Buffett is either
the richest man in America or one of the richest men in America.
From 1957 to the present (over 40 years!), Buffett has
achieved an average annual return of more than 25 percent per year on
his stock investments. However,
Buffett did not achieve this enviable record using some
complicated investment strategy or by borrowing money to magnify his
investment returns. Instead, some simple, familiar themes begin to emerge when
you study his investment philosophies.
Buffett buys stock in what he calls franchise companies -
companies that produce products that society needs or wants. He buys these
stocks with the intent of never selling them.
He meticulously studies each business of interest, and only
buys the stock of companies in sound financial condition that can be
purchased well below his assessment of their intrinsic value.
Buffet only buys stocks of companies that he understands.
Some of his largest stock investment returns have been made in
household names like Capital Cities/ABC, Coca-Cola, and The Washington
Post.
Anne Scheiber, 1894 - 1995. Anne
Scheiber is probably unknown to most people.
However, her accomplishment of creating a $20 million
estate by investing in the stock market over approximately 50 years
makes her a very successful amateur investor.
There is some debate over her true investment return over the
50-year time span, but it appears that it probably ranged between 12
and 17 percent per year. Scheiber
learned by reviewing the tax returns of wealthy
individuals during her career as a tax auditor with the Internal
Revenue Service that stocks were a proven way to get rich in America.
Her investment strategies were simple: invest in companies that
create products that you know and admire, continue to invest, never
sell stocks you believe in, and keep informed of your current
investments. In fact,
Scheiber's top ten stock investments before she died included such well known
companies as Coca-Cola, Exxon, and Bristol-Myers Squibb.
National Association of Investment
Clubs (NAIC), 1940 to present. NAIC is
probably the best, well kept secret for the individual stock market
investor anywhere. NAIC is a national organization that anyone can join that assists
individual investors and investment clubs by providing investment
education. Over the years, NAIC has developed an investing philosophy
that can be used by anyone to identify a diversified group of growth
stocks that are selected to double in value in five years.
The national annual average return for the stocks owned by
thousands of investment clubs associated with NAIC throughout America
have frequently outperformed stock market averages for the past 30
years.
Peter Lynch, 1944 to the present. Peter Lynch may be the most widely recognized stock market
investor. From 1977 to
1990, Lynch piloted the now famous Magellan Mutual Fund to an amazing
29 percent average annual return.
He is the author of several popular books, appears as a
guest speaker on numerous television programs, and is a columnist for
several
magazines. Lynch's
investment philosophy and advice for others is simple: invest in what
you know, ignore the advice of others (including professional
investors), ignore market fluctuations, and look for companies
undiscovered by professional investors.
These
biographical sketches should convince you that anyone, regardless of
background or training, can succeed in the stock market.
Individual investors can compete head to head with professional
investors and, more importantly, investment principles between
successful individual and professional investors are
often very similar. Considering
the complexity of the stock market, it is surprising that so many
common threads run through these widely diverse, but successful, stock
market investors. These
common threads or guidelines for stock market success can be
summarized as follows:
·
Invest
for
the
long
term
·
Diversify
your
investments
·
Invest
regularly
·
Avoid
market
forecasting
·
Know
what
you
are
investing
in.
What could be easier? The
financial community seems to always make things more complicated and
confusing than they need to be. Never
confuse sophistication with success.
Simple, proven strategies followed religiously often produce
superior results. The
next six articles in this series are dedicated to first explaining why
these five universal principles form the cornerstone of successful
investing, and then demonstrating how anyone can apply them to select
successful investments for themselves.
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