How to Trade Stocks Like the Greatest Investors in HistoryPeople often trade stocks hoping to emulate some of the greatest investors in history. This can only be done with an understanding of how their strategies first emerged.
While we can’t guarantee that following any of the strategies listed below will get you a strong return, studying the masters is certainly a good idea when it comes to improving your own stock trading.
Below are profiled just a handful of investors, picked because their styles are all different. There are many other hugely successful investors whose strategies fall somewhere between those outlined here.
Remember: the strategies outlined here are listed for educational purposes only and are not to be considered investment advice. You must choose how to trade stocks in a way that best suits your circumstances and experience and only with a regulated Broker.
No list of classic investors would be complete without Benjamin Graham, who is widely considered the father of security analysis and value investing.
His book The Intelligent Investor is considered one of the greatest books on investing of all time.
Graham’s approach, as you might expect from the founder of value investing, was to find stocks whose prices much lower than the underlying fundamentals of the issuing company suggested they should be. He would look closely at a company’s books, finding those with strong balance sheets, above-average profit, solid cash flow, or little debt.
He identified stocks that were undervalued given the strength of the company to which they belonged and profited when the wider market cottoned on. You can easily do the same kind of analysis as Graham in order to find overlooked stocks.
Warren Buffett is a disciple of Benjamin Graham, so much of his investment strategy is the same.
A particularly interesting part of Buffett’s investment strategy that warrants mentioning it is ‘circle of competence’. Buffett only invests in companies that he has a very strong understanding of. Everyone has a circle of competence – it is what you have a wealth of knowledge about. Your circle doesn’t have to be very big, and it can grow over time as you acquire new skills and expertise.
Put simply, if you have a strong interest in cars, it makes more sense to invest in General Motors than it does BNP Paribas.
No matter how attractive a certain stock may be at any given moment, Buffett will not invest in it unless it falls within his circle.
Philip Fisher is perhaps the best-known of the buy-and-hold investors. His book Common Stocks and Uncommon Profits was the first investment book to become a New York Times bestseller, and his wisdom holds true today.
Fisher was a growth investor, who believed in carefully researching the fundamentals of a company to identify potential for growth and sticking with the stock through thick and thin. He bought Motorola shares in 1955 and famously still held them when he died in 2004. His approach to investing was incredibly intensive and involved questioning numerous people related to the company and industry in which he was considering purchasing stock.
He believed in the quality of a company’s management was one of the greatest assets a business could have, and would not buy stock in a company with a poor or mediocre management team.
While this approach is likely to be too much effort for all but the most hard-core traders, there are still plenty of ways his approach can still be applied today.
Fisher held some contrarian views to the wider markets. For instance, he did not like stocks that paid dividends, as in his mind this was capital that could be better used to fuel growth. He also knew that a company may have a low operating profit because it was committed to growth, rather than because its sales were poor.
John Templeton is known as one of the world’s greatest contrarian investors, meaning he often went against the market, sometimes buying stocks that no other investor would dare touch. For example, when other investors started selling stocks heavily at the outbreak of the Second World War, Templeton borrowed money in order to take positions in over a hundred US companies. Out of all the shares he bought, only four companies failed to return him a profit.
He later avoided tech stocks altogether during the boom of the late 90s, instead of buying into commodities, and was rewarded with handsome profits when Asian markets recovered and commodity demand picked up, while those who had bought tech stocks famously lost out when the Dotcom Bubble burst.
In 1939 Templeton spent $10,400 buying $100 worth of every stock trading below $1 per share in the New York and American stock exchanges. An amazing 34 of these companies were bankrupt at the time he purchased their shares, yet after four years he sold the whole lot for nearly quadruple his initial capital outlay.
Templeton’s investment style was to focus on value stocks, similar to Benjamin Graham, except that he pushed this further, seeking out stocks that had been deliberately neglected by the markets rather than simply overlooked. Often this was because the companies were sending out distress signals, such as bankruptcy.
If you want to be a contrarian you must know what you’re doing. It’s no use just going against the market for the sake of it; you need an understanding of what is driving the markets, and a good argument for why you think other investors are wrong in the way that they are stock trading.
One of the most successful fund managers of his time, Lynch has been described by many as a ‘chameleon’, as he never had a fixed investment style, but adapted his strategy depending upon what worked at the time.
Although at first glance it may seem like his strategy was therefore to have no strategy, he still stuck to his areas of expertise, and never got involved in something he didn’t understand. That latter point is important, as a lack of understanding is one of the key reasons why inexperienced investors often lose big money when they first start trading.
It may be that one of these investment styles already resonates with you. Some of these investors adhered firmly to one style of investment, such as Benjamin Graham who was staunchly a value investor, while others had a more mixed approach, or no fixed approach at all, like Peter Lynch.
Having an investment philosophy comes down to how you view the stock market, what you believe about the way businesses and the economy work, and whether you like risk or try to avoid it.
The strategies here are only presented as information and inspiration, and may not necessarily be right for your circumstances. There are still many good nuggets of wisdom to be found, even in strategies that go against your own personal approach or preferences.