David Kuo: Gurus are good – but don't follow blindly
Sunday 25 July 2010
Who is the best financial guru for private investors to follow? Could it be Warren Buffett or his mentor, Benjamin Graham? Perhaps it is Peter Lynch or Anthony Bolton.
Some might argue that we should not ignore Jim Slater, Jim Rogers or Neil Woodford. Therein lies the problem. Pitting the investing acumen of one financial guru against another is tantamount to telling a Brazilian that Johann Cruyff is a better footballer than Pelé.
Consider a successful investor such as Warren Buffett, whose investing approach has been dissected and scrutinised. In theory, the investing world should by now be populated with countless Buffett–like billionaires if we had followed his investing mantra. However, emulating the financial guru is not a straightforward task.
Buffett was a disciple of Benjamin Graham, arguably the most eminent technician of value investing. However, Buffett's investing style has evolved appreciably over time. In his early days, Buffett doggedly followed Graham's technique of buying assets that he referred to as "cigar butt" companies. These businesses were supposed to have a few quick "puffs" left in them, and by and large they did.
Over the years, though, Buffett has refined the technique by buying undervalued shares that he is willing to hold seemingly for ever. Ironically, one of his recent major successes was not a share that he bought and held for the long term. Instead, he flipped his $488m stake in PetroChina, which he held for just five years, for a "quick" profit of 700 per cent.
Peter Lynch is a great exponent of growth investing. He clocked an average annual return of 29 per cent from 1977 to 1990, while he was at the helm of Fidelity's Magellan Fund. Lynch would invest only in what he knew, and he would never invest in anything he could not easily illustrate with a crayon.
Lynch also devised a rule of thumb known as the peg (or price earnings growth) ratio that helped him to identify shares that could be considered cheap. He divided the price to earnings ratio by the earnings growth to arrive at a single ratio. Shares with a peg ratio of less than one were, by his yardstick, deemed to be undervalued.
By contrast, Neil Woodford is a contrarian investor who focuses on sustainable dividend yields as a way of gauging cheapness. That said he cannily avoided high-yielding bank shares ahead of the banking crisis.
Anthony Bolton is another contrarian investor. As manager of Fidelity's Special Situations fund, he invested against the tide and delivered an annual return of 20 per cent over a 25-year period. Bolton specialised in unearthing turnaround situations.
By all means follow the teachings of the gurus, but develop a style of your own that suits your temperament, your personality and your pocket.
David Kuo is director of investment website fool.co.uk
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