What Do Great Investors Have In Common?

...they are "financial philosophers."  This is one of those "stating the obvious" posts...  If any informed investor were asked to name five of the greatest investors of all time, arguably, these three men would be included somewhere in that list:  Benjamin Graham, Warren Buffett, and Bill Miller. 

If we were to also ask what those great investment minds have in common, it would not be difficult to arrive at a handful of similar investment strategies and common views on the stock market but it is unlikely that the word "philosopher" would be included as a common trait or descriptor of those men.

In my view, Messrs. Graham, Buffett, and Miller are philosophers first and investors second, which is, in my humble opinion, what makes them great.  What makes them philosophers is not that they necessarily have practiced or taught philosophy as a profession but that they all make (or have made) observations of human behavior, especially behavior that drives financial markets and investors to succeed terrifically or to fail miserably.  And, just as any classic philosopher would do, they also support(ed) logical, simple thinking over technical, complex thought and display(ed) self-doubt before proclaiming their intelligence...

Benjamin Graham, often referred to as “the father of value investing,” is perhaps best known as Warren Buffett’s mentor, who called Graham’s book, The Intelligent Investor, “the best book on investing ever written.”

Mr. Graham’s investment philosophy was centered upon the notion that investors should profit from the irrational behavior of “Mr. Market” rather than participating in it.  Here are some of Mr. Graham’s observations on investing and human behavior:

"The investor's chief problem -- and even his worst enemy -- is likely to be him self."

"Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or gamble... to give way to hope, fear and greed."

"If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what`s going to happen to the stock market."

"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks."

Warren Buffett, currently the third-richest person in the world, was made famous by  the enormous success of his self-described “capital allocation” via his holding company, Berkshire Hathaway.  The "Oracle of Omaha's" colorful and philosophical shareholder meeting statements have made his words legendary in the world of investing.  Here are some of Mr. Buffett’s observations on investing and human behavior:

"The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective."

"We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful." 

"Look at market fluctuations as your friend rather than your enemy; profit from folly rather than participate in it."

"I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years."

Bill Miller may be best known for beating the S&P 500 index for 15 consecutive years, from 1991 through 2005, as fund manager of Legg Mason Value Trust (LMVTX).

Mr. Miller not only talks the philosopher talk but walks the philosopher walk.  In addition to his exceptional money management skills, Bill is chairman of the Santa Fe Institute, a think tank devoted to scientific research of “common themes that arise in natural, artificial, and social systems,” including studies of human behavior. 

Here are some of Mr. Miller’s observations on investing and human behavior:

"What we are really trying to do is to think about thinking… Understanding how groups behave is central to understanding how complex adaptive systems - such as the stock market - work."

"The problem is that real risk and perceived risk are two different things. And that's where people get into trouble, because they perceive risk to be high when prices are low, and they perceive risk to be low when prices are high. That's the psychological problem that most people have."

"I think index funds ought to constitute, just from the broad standpoint of prudence, a significant portion of one's assets in equities. Because you know, the evidence is that over any substantial period of time - ten years, 15 years, 20 years - the odds that you will get a money manager who can outperform that period of time are about one in four."

There is nothing substantial I can add to the words of those three great investors but simply to say that I hope to emulate, not necessarily their investment philosophies, but their simple, logical, wise views of the markets and of life, in general...

TFPAuthor, Kent Thune, is the President and Owner of Atlantic Capital Investments, LLC (ACI), a 'fee-only' Registered Investment Adviser firm located in Mt. Pleasant, SC.

Comments

[Jeremy Welch]

What a great post. I am a new reader, but I have quickly become a regular. I am a philosophy major at a top university and I aim to use my training in investing and business.

Another philosopher/investor I have come across recently is Nicholas Nassim Taleb, author of "Fooled by Randomness" and "The Black Swan."

Keep up the great work!

[Eric]

This is an original and refreshing blog. Thanks for creating it.