Dare to Be a Great Investor
by Tracey RyniecJuly 30, 2010 | Comments : 0 Recommended this article: (0)
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I've been to a bunch of barbecues this summer and when it comes up that I'm a stock strategist, people shake their heads every time and say things like
"Stocks are too scary right now."
"Stocks go down too much."
"You can't make money in stocks."
The pullback in stocks during May and June clearly has people on edge, despite the big rally off the March 2009 lows. But that's the thing about pullbacks; they create opportunities.
During bull markets, it's fairly easy to post solid numbers year after year in a portfolio. But who is still standing when the stuff hits the fan?
Great Investors Are Made Through Adversity
When market sentiment turns negative, those with the guts to get in are rewarded. Two of the greatest investors in the last 75 years, both value investors, were tested in both bear and bull markets.
Was it always easy? Heck no!
John Templeton, the founder of Templeton mutual funds, was shaped by the stock market of the Great Depression. In the same vein, Warren Buffett made his fame by going on a buying binge during the super bear market of 1972-1974.
Great investors emerge when the going gets tough because that's when the greatest profits can be made.
Do You Have What It Takes?
Looking at the careers of Buffett and Templeton, three criteria for being a great investor emerge:
- Be a contrarian
- Timing is everything
Be a Contrarian: Buy When Others Are Not
The classic definition of a value investor is someone who buys companies that are not on everyone else's radar. They are out of favor or, frankly, mocked. Both John Templeton and Buffett are known for being value investors.
John Templeton put himself through college during the Great Depression and then set out to start his career on Wall Street during the worst possible time.
It was the late 1930s and stocks, which had crashed during the Great Depression in 1929, still hadn't fully recovered.
In 1939, with the world going to war, he decided to buck the convention that stocks stunk. He borrowed money to buy 100 shares each of 104 companies that were selling at $1 a share or less.
Some might have thought he was crazy as 34 were in bankruptcy at the time.
But the risk paid off.
Ultimately, only 4 of the companies ended up being worthless and the rest went on to large profits.
Timing is Everything
Warren Buffett hasn't always been 100% invested in stocks.
In 1969, as stocks were heating up, Buffett cashed out all of his holdings, telling Forbes Magazine in 1974: "When I got started the bargains were flowing like the Johnstown flood; by 1969 it was like a leaky toilet in Altoona."
But by 1974, after two years of stock market carnage during the super bear market of 1972 and 1973, which made stocks cheap, Buffett was back in the game.
Forbes asked him what he felt about the markets that year: "Like an oversexed guy in a harem," he shot back. "This is the time to start investing."
By the time the interview was set to run in the magazine, the markets had rallied 15% and Forbes asked him if he was still feeling the same way.
"I don't know what the averages are going to do next," he replied, "but there are still plenty of bargains around." He told Forbes that the situation reminded him of the early 1950s.
Recently, Buffett was back to his predicting ways, telling the New York Times on Oct 16, 2009: "A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."
Patience is a Virtue for Great Investors
Patience is also critical to being a great investor because market conditions don't always change on a dime. You have to be prepared to stand by your convictions, which can mean waiting a long time for sentiment to move your way.
Buffett added to his positions in 2009 in the middle of the doom and gloom of the financial crisis.
Templeton held his 1939 investments for 4 years on average, despite a global war.
Lessons from the Great Investors
Volatile markets are opportunities to elevate your investing game. John Templeton and Warren Buffett have done just that.
The investing lessons of John Templeton and Warren Buffett are there for the taking.
Don't settle for being just an average investor. Dare to be great.
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