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The Mount Rushmore of investors

Posted by Massimo Satira October 11, 2019 • 6 min read

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  • Who are some famous investors and what made them famous
  • Some of their most important ideas
  • What everyday investors can learn from them

In January 2019, the investing community lost an icon when John Clifton (“Jack”) Bogle, founder of The Vanguard Group, passed away at the age of 89. Here at Questrade, Bogle is a legend. Regarded as the person who invented index investing, he stressed the importance of keeping investment costs low to get the most from your returns.

Bogle isn’t the only legend of the investing world. While we live north of the border, we still wanted to put together our own personal “Mount Rushmore” of the titans of investing, a run-down of the people who’ve made a significant impact to the way we invest today.

Jack Bogle

Bogle studied economics and investment at Princeton University. He was an ardent critic of fees and believed the cost of an actively managed fund wasn’t worth it. “The two greatest enemies of the equity fund investor,” he said “are expenses and emotions.”

Influenced by the works of Paul Samuelson, who was considered the Father of Modern Economics, Bogle founded First Index Investment Trust in 1976. With it, he launched the first index mutual fund available to the general public, and a precursor to the Vanguard 500 Index Fund.

Instead of trying to beat the market and charging high management fees for all the associated costs, the index fund aimed to mimic index performance over the long run.

Surprisingly, the new fund was initially a flop. The idea of paying for an investment inherently designed to achieve average performance wasn’t one people were interested in. But gradually, people came to understand that high fees do not guarantee superior performance — and they eat away at whatever returns are achieved. Bogle’s innovation gained momentum, eventually becoming so popular that 40-some years later, about 40% of US stock market funds are considered passive trackers rather than active stock-pickers.

In a 2005 speech, Paul Samuelson said, “I rank this Bogle invention along with the invention of the wheel, the alphabet, Gutenberg printing, and wine and cheese.”

Throughout his career Bogle argued for an approach to investing marked by simplicity and common sense. He set out eight basic rules to guide investors:

  1. Select low-cost funds
  2. Consider carefully the added costs of advice
  3. Do not overrate past fund performance
  4. Use past performance to determine consistency and risk
  5. Beware of stars (as in, star mutual fund managers)
  6. Beware of asset size
  7. Don’t own too many funds
  8. Buy your fund portfolio – and hold it

In investing, you get what you don’t pay for. Costs matter.

Bogle is quoted as saying, “Intelligent investors will use low-cost index funds to build a diversified portfolio of stocks and bonds, and they will stay the course. And they won’t be foolish enough to think that they can consistently outsmart the market.

For more of his investing insights, check out Bogle’s 1999 book, Common Sense on Mutual Funds.

Benjamin Graham

Benjamin Graham is known as the father of value investing, an approach that involves buying stocks that are trading for less than their fundamentals would suggest they are worth. It’s basically the principle of buying low and selling high.

His book The Intelligent Investor was described as “by far the best book on investing ever written” by none other than Warren Buffett himself (our next titan). In fact, although many people have heard of Warren Buffett but not Benjamin Graham, Graham was labelled “the investor who taught Buffett everything he knows” by a Business Insider article.

In his book, Graham shares his famous allegory of Mr. Market. Mr. Market is described as manic-depressive investor who offers to buy or sell shares from the stock holder for a wide range of prices. They range from exorbitantly high, to plausible, to extremely low, with no predictability about what he will offer on any given day. The stock holder can choose to trade with him or not.

The point of the story is that the investor should not regard Mr. Market’s whims as determining the value of the stock holder’s shares. Instead, the key to successful investing is to focus on the actual performance of the companies and the dividends received, rather than the irrational and unpredictable behaviour of the market.

Graham urged people to make the distinction between investing and speculating. He taught that someone who buys shares in a company should think of it as having ownership in the company. Investors shouldn’t concern themselves too much with the ups and downs of the market (as illustrated in his Mr. Market allegory). Graham observed that in the short term the market behaves like a “voting machine” that measures popularity, but in the long term it is a “weighing machine” that measures substance, and that a stock’s price will reflect its true value in the long run.

Warren Buffett

Warren Buffett’s name is perhaps the most well-known of the investing titans. Buffett is the fourth wealthiest person in the world, with a net worth of $81.4 billion, according to the July 23, 2019 ranking of the Bloomberg Billionaires Index.

The Chairman of Berkshire Hathaway, Buffett is a renowned business magnate, investor, philanthropist and speaker who has acted as a “voice of reason” for many investors. His way with words enables him to make investing concepts accessible to the average person. “Our favorite holding period is forever,” is one of his sage pieces of advice.

His wisdom holds even greater weight because Buffett’s wealth is truly self-made — he engaged in a series of entrepreneurial activities from a very young age (starting with selling chewing gum and magazines door-to-door), gradually and carefully building more and more wealth. By the time Buffett graduated from college, rather than owing money, he had accumulated nearly $10,000 — or just over $100,000 in today’s currency.

Buffett shaped his investment philosophy around Benjamin Graham’s ideas about value investing, a principle he’s known for, along with a reputation for personal frugality despite his immense wealth.

Harry Markowitz

While Markowitz isn’t an investor, his economic research (which earned him the Nobel Memorial Prize in 1990) provides an important foundation for most investing done today. Markowitz pioneered “Modern Portfolio Theory,” which is the basis of today’s investment portfolios. He studied how asset risk, return, correlation and diversification affect probable investment returns.

In essence, Modern Portfolio Theory takes the idea of diversification and extends it, saying your risk should equal your potential reward and that you can diversify your portfolio to decrease risk.

In his 1959 book, Portfolio Selection: Efficient Diversification of Investments, he observed that “A good portfolio is more than a long list of good stocks and bonds. It is a balanced whole, providing the investor with protections and opportunities with respect to a wide range of contingencies.”

In his research, he also discovered that once a certain level of diversification is reached, risk stops decreasing. A portfolio is described as a “Markowitz efficient portfolio” when it reaches the highest expected return for its level of risk. It’s sort of like preparing for a test, and walking into the exam room confident that the grade you’ll get will be the best possible result given the effort you put into studying.

He is quoted as saying: “I only have one piece of advice: Diversify…. And if I had to offer a second piece of advice, it would be: Remember that the future will not necessarily be like the past. Therefore we should diversify.”

Learning from the greats

In an era where information is everywhere but wisdom is much harder to come by, we believe it’s important to look to those who have dedicated themselves to acquiring deep understanding about investing. These investing giants became great, not simply because of the wealth they may have accumulated, but because of the lessons they have taught. Each one is a source of education and inspiration for anyone interested in finance and investing.

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The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.