The Highly Effective Habits of 7 Legendary Investors

When I was in college—in my first Finance class—I was introduced to Benjamin Graham and David Dodd’s book, Security Analysis: Principles and Technique. I’ll just tell you—that is my favorite investment book of all time! And since I read it (yes, the entire book!), I have been fascinated by the minds and strategies of the most successful investors.

And with the recent market gyrations, I thought it would be a good time to explore the strategies of some of these masterminds so to help convey that there are many different styles and techniques for investing that can each result in very profitable outcomes.

You can see that with our newsletters here at Cabot. If you love growth, you are likely a subscriber to Mike Cintolo’s Cabot Growth Investor. If value is your cup of tea, you’ll find Chris Preston’s Cabot Value Investor to your liking. Small-cap investors will flock to Tyler Laundon’s Cabot Small-Cap Confidential. Tom Hutchinson’s Cabot Dividend Investor will satisfy folks who are interested in cash flow, and investors who like a little more activity will love Jacob Mintz’s Cabot Options Trader. Additionally, as you know, we also offer newsletters based on trading, cannabis, turnarounds, and international investments, as well as my Cabot Stock of the Month, part of Cabot Money Club, what I like to call, “the educational arm of Cabot.”

Although their styles can be very diverse, the one thing each of these newsletters has in common is their long-term successful track records that have made our subscribers a ton of money. No, we are not infallible—none of us have crystal balls—but our overall investment gains are real.

And that’s the case with the following group of successful investors I want to bring to your attention today. Varying styles, for sure. Some crazy personalities, yep. In and out of favor with the markets, a truism. But long term, these folks have beaten the odds

And my hope is that as you develop your own investment style, you will find many of these techniques interesting so that you can pick and choose which ones may sharpen your profit-seeking skills. So, let’s go!

The Great Masterminds of Investing

Benjamin Graham

Of course, I’ll start with Ben Graham, who most of us in the business consider “the father of analysis and value investing.” He died at age 82 in 1976, with a fortune estimated at $50 million (that’s about $280 million) today. Not bad for a university professor, hmm?

Graham’s strategy—in a word—was value investing, buying net-net companies—businesses whose price was below their cash on hand.

He believed in trying to “buy $1 in value for 75 cents or even less.” His go-to philosophy: “Cigar butt investing,” an approach where there’s a puff of value left in a stock but little downside in buying it.

In addition to Security Analysis, Graham also wrote the very popular The Intelligent Investor. His primary investment strategies include:

Principle #1: Always Invest with a Margin of Safety, meaning buying an investment “at a significant discount to its intrinsic value, in order to make money and to also minimize its downside risk, utilizing parameters such as earnings per share (EPS), book value, and investing multiples.”

Principle #2: Expect Volatility and Profit from It. In other words, don’t panic during downturns, as they present opportunities to find some great companies trading at undervalued levels. In fact, Graham thought you should only “buy when the price offered makes sense and sell when the price becomes too high.”

Graham also recommended keeping 25% to 75% of your investments in bonds, based on market conditions.

Principle #3: Know What Kind of Investor You Are: active or passive, speculator or investor. Graham didn’t really adhere to the typical “risk = return” notion. Instead, he said, “The more work you put into your investments (active), the higher your return should be.” And if you don’t have time to put in the work, you should probably be a passive investor and let index funds work for you.

And you also need to know if you are a Speculator or Investor. Graham defined the difference this way: “An investor looks at a stock as part of a business and the stockholder as the owner of the business, while the speculator views themself as playing with expensive pieces of paper, with no intrinsic value. For the speculator, value is only determined by what someone will pay for the asset.” You can think of investors as folks who buy and hold for a while, while a speculator probably prefers to trade stocks.

Lastly, today’s most well-known, successful value investor, Warren Buffett, was a student of Graham’s at Columbia University. He, obviously, picked up a few tips, didn’t he?

Warren Buffett

How can you argue with the investing philosophy of someone worth $160 billion (and who has donated more than $55 billion of Berkshire stock since 2006)?

As much as I admire Buffett, CEO and chairman of conglomerate Berkshire Hathaway, I remember a time when many Wall Street gurus were calling him a “has-been.”

It was during the tech boom of the late 90s, when technology investing was in its heyday. No matter how high the P/E was or regardless of whether the company had made any money yet (and there was no real estimation of when it would)—investors just couldn’t get enough of those high-flying stocks. But back then, Buffett stuck to his own wisdom, saying, “Never invest in a business you cannot understand.” He didn’t buy the cutting-edge stocks. He now admits that he was somewhat wrong, and today, he does invest in technology. But on the other hand, while most investors were bleeding money during the subsequent tech bust, Buffett was sitting pretty.

Like his mentor Ben Graham, Buffett started out as a Value investor (he bought his first stock at age 11 (Cities Services Preferred). He was a buy-and-hold investor, and has been quoted as saying his “preferred holding period is forever.” You may be interested to know that Coca-Cola (KO) has been in Buffett’s portfolio since 1988, his longest holding.

However, while Buffett still values value, he has expanded his philosophy to include many Growth stocks over the past couple of decades.

And while Buffett holds a variety of stocks in his Berkshire Hathaway portfolio, most of the names are companies that have been around a long time—and businesses you will recognize. Investor’s Business Daily just released Berkshire’s top holdings (and market value), which include:

1. Bank of America (BAC), $680.2 million
2. Coca-Cola (KO), $400 million
3. Kraft Heinz (KHC), $325.6 million
4. Apple (AAPL), $300 million
5. Occidental Petroleum (OXY), $265 million
6. American Express (AXP), $151.6 million
7. SiriusXM (SIRI), $119.8 million
8. Chevron (CVX), $118.6 million
9. Kroger (KR), $50 million
10. Nu Holdings (NU), $40.2 million

The total sum of that portfolio is worth about $267 billion. And that doesn’t count the companies that Berkshire owns most or all of, 67 in total, which you can find right here.

Now, if you were lucky (or smart) enough to own about $1,000 of Berkshire (BRK-A) shares in 1965 (at $19 per share, when Buffett took over the company), you would be pretty set for retirement. Today, those shares closed at $783,684.00 per share. But hey, even if you bought $1,000 of BRK-B when it began trading in 1996 at $23.26 per share, you’d be happy with today’s price of $523.14, wouldn’t you?

So, what is his secret?

His investing strategy boils down to these four principles:

1. Identify high-quality businesses that make money and generate cash flow, have a competitive advantage, and durability.
2. Buy companies that earn good returns on capital and generate cash flow for their owners.
3. Look for capable managers.
4. Don’t pay too high of a price.

If you google Buffett quotes, you’ll come up with hundreds, but the following ones are probably some of the sagest advice you’ll ever get about investing:

Don’t lose money. You can do this by “thinking about what can go wrong before you think about potential gains, which can help you avoid major setbacks in investing.”

Be fearful when others are greedy and greedy when others are fearful. In other words, buy when most people are selling so that you can grab opportunities at discounted prices. And vice versa.

Wait for the right pitch. That is, the right price.

Productive assets are the only investments to make, meaning stocks, real estate, bonds or farmland, instead of speculative assets such as gold or cryptocurrencies that don’t produce anything for their owners. You might disagree with that as we’ve seen gold shoot over $3,000 an ounce in recent days!

Bottom line, like Ben Graham, Warren Buffett is focused on buying stocks at the right price, and I think that’s some of the best advice you’ll ever get.

Peter Lynch

At age 33, Peter Lynch took over the management of the Fidelity Magellan Fund. Over the next 13 years, he averaged returns north of 29% annually. He retired at age 46, and today his net worth is estimated at $450 million.

Like Graham and Buffett, Lynch is a value investor. His most famous advice to investors was, “Buy what you know.”

He wrote the books, One Up on Wall Street: How to Use What You Already Know to Make Money in the Market, and Beating the Street, discussing this strategy and how he bought what he named “10 bagger” stocks—stocks that would go up ten-fold—by watching what products and services your friends and family were buying.

He famously told the story of how he bought L’eggs (hosiery) stock after his wife got a free pair (which she raved about!) when the company was test-marketing the product. The end result: L’eggs became a 30-fold investment!

Other ten-baggers Lynch bought included: Fannie Mae, La Quinta, Masco Corporation, Ford Motor, Philip Morris International, Taco Bell, Dunkin’ Donuts, and General Electric.

Lynch didn’t buy companies whose earnings per share were growing faster than 50% because he considered them “hot” with unsustainable earnings growth rates. And he didn’t like financial or real estate companies. Instead, he focused on:

• A price-to-earnings ratio (P/E) less than the industry mean.
• A P/E less than the five-year average.
• The ratio of the P/E to the sum of the five-year growth rate in earnings per share and the five-year dividend yield (dividend-adjusted PEG ratio) less than or equal to 0.5%.
• The five-year growth rate in EPS from continuing operations less than 50%.
• The percentage of common stock held by institutions less than the median percentage of institution ownership.
• The total liabilities to total assets ratio for the last fiscal quarter (Q1) less than the industry’s median total liabilities to total assets ratio for the same time period.

John Bogle

Bogle was the founder of Vanguard and the creator of index mutual funds. When he died in 2019, he was worth about $80 billion.

Bogle’s investment strategy was to diversify by buying low-cost index funds, specifically, total market funds with low turnover and minimal management fees.

His investing philosophy is followed by some 120,000 “Bogleheads” in an online community—a group of Bogle followers that believe that this strategy produces above-average risk-adjusted returns, based on the results of Nobel prize-winning research on Modern Portfolio Theory and the Capital Asset Pricing Model.

Bogle’s investing strategy can be summed up in seven steps:

1. Invest; you must. Otherwise, you’ll miss out on “earning a sufficient return on your capital as it accumulates.”
2. Time is your friend, due to compounding returns.
3. Impulse is your enemy. Get rid of emotion, or as I often say, “It’s ok to fall in love with the company, but not the stock!”
4. Basic arithmetic works. Keep your costs low so your returns are greater.
5. Stick to simplicity. Allocate your portfolio among stocks, bonds, and cash reserves; keep it diversified into “middle-of-the-road, high-grade securities”; balance risk and return; and watch costs carefully.
6. Never forget reversion to the mean. Strong performance will most likely revert to the stock market norm—and often below it.
7. Stay the course. Forget market ups and downs; “stick to your investment program,” or you are likely to make a huge mistake by changing your strategy at just the wrong time.

Bill Miller

Miller was the chairman and chief investment officer of Legg Mason Capital Management, as well as the principal portfolio manager of the Legg Mason Capital Management Value Trust, where he outperformed the S&P 500 Index for 15 consecutive years—an unprecedented record. He was also the portfolio manager of the former Legg Mason Opportunity Trust mutual funds, currently housed at his own firm Miller Value Partners.

However, his successes were overshadowed by his Bitcoin investments, which caused a more than 70% decline in his fund during a period of 18 months.

Miller announced his retirement at the end of last year and has a reported net worth of $1.8 billion.

His investing style is contrarian, and considers value, but has been described as a “fusion of various approaches synonymous with iconic value investors.” Value investing and contrarian investing are often interwoven. While both strategies identify discounted stocks, contrarians believe that “the market often overreacts to news and events, creating opportunities to buy low or sell high.”

Consequently, Miller believes that some companies are trading for much less than their actual worth. He’s not a market timer and doesn’t forecast market moves, but he has had an incredible track record of buying and selling at the right times.

And his track record bears that out. He gained notoriety for the right calls on his purchase of American Express in 1963 after the salad oil scandal/fraud adversely affected the company’s bottom line and stock price; his 1980s investment in Coca-Cola, when the company was facing serious competition from the Pepsi Challenge; and his Wells Fargo investment during the 1990s savings and loan crisis.

Each one of those “contrarian” investments worked out very profitably for Miller.

The three tenets of Miller’s investing strategy are:

Laser focus on consistent free cash flow (FCF) as an indication of a company’s genuine profitability and sustainability. FCF is the actual cash a company generates after deducting operating expenses and capital expenditures. Miller calculates a stock’s expected return by

combining the FCF yield and the anticipated growth rate.

Disregard investing labels. He doesn’t care about pigeonholing a stock into a certain style or industry; instead, he looks for strong fundamentals and the potential for growth.

Buying at low-expectation inflection points and holding. In other words, buying during periods with low market expectations, then hanging on to the investments for a while, so that the company’s intrinsic value can be realized.

Sir John Templeton

John Templeton created the Templeton Growth Fund in 1954. Five years later, the company became public with five funds and $66 million under management. He sold out to Franklin Resources in 1992, for $913 million.

Templeton’s rules for investing include:

Invest, don’t gamble. Don’t try to time the market, jumping in and out; instead, stay invested.

Invest in value and quality: Companies that are leaders in a growing market, technological leaders, have strong management teams with proven track records, are well-capitalized, and are well-known, trusted brands for high-profit-margin consumer products.

Invest, when the going is tough: Go against the crowd. Templeton did just that, investing $10,000 during the Great Depression, spread around 104 stocks, each trading under $1. He sold them after the Second World War for $40,000.

Invest for maximum total real return after investment costs, inflation, and taxes.

Additionally, Templeton advocated that you “do your homework or hire wise experts to help you; aggressively monitor your investments; don’t panic; learn from your mistakes; never invest on sentiment; never invest solely on a tip; and do not be fearful or negative too often.”

Carl Icahn

Now, we’re switching to what I call bolder investors. And Carl Icahn certainly fits that description.

Icahn began cementing his reputation as a corporate raider in the late 1970s when he took a controlling stake in Tappan and forced the sale of the company to Electrolux—for which he earned $2.7 million (twice his initial investment.) He made several similar deals but really came to the world’s attention in the 1980s, after he stripped the assets (to repay money he owed) of Trans World Airlines, following his hostile takeover.

His goal is to “buy shares in a company (or the entire company) to force management to fix underperforming operations and create shareholder value.” He often replaces or reshapes the company’s Board of Directors and divests assets he deems to be undervalued.

Icahn’s track record is legendary and has boosted his net worth to some $4.5 billion, and includes some big wins:

• Apple was forced into a “significant buyback program which increased shareholder value.”
• eBay had to spin off PayPal, which created value for both companies.
• Netflix: Icahn was behind the push into streaming from an unsuccessful attempt to spin off its DVD segment. For his trouble, Icahn netted about $1.9 billion in profits.
• RJR Nabisco was debt-laden in the early 1990s, and Icahn was behind the spin-off that birthed Kraft Foods. Icahn gained 60% on his shares.

Not everything Icahn has touched has turned into gold. He famously lost $1.8 billion in Hertz after the company filed for bankruptcy in 2020.

Then, in the spring of 2023, short-seller Hindenburg Research claimed that Icahn’s company was “over-valued due to paying large dividends using investments from new investors. In addition, the analysis claims that Icahn took out loans against a majority of his holdings and that these have the potential to be called should the stock price move downward.” That caused a rapid decline in the stock, which hasn’t really recovered.

And on top of that, this past September, Icahn settled with the SEC, for $2 million, for “failing to disclose that he had personally pledged his own stock as collateral for margin loans worth billions of dollars.”

Some bad tidings, for sure. Nevertheless, Icahn isn’t in danger of wearing second-hand clothes anytime soon.

And for your perusal, here’s how his investing strategy breaks down:

Contrarian—buying assets when they’re undervalued and unpopular, as represented by low P/Es and undervalued book values. Hmm…that sounds familiar, doesn’t it?

Seek companies that need divestitures of undervalued assets and have excessively paid CEOs.

Greenmail: Pressuring companies into buying back shares at inflated prices to avoid hostile takeovers or proxy fights.

View stocks as ownership stakes in businesses rather than mere pieces of paper. Consequently, he believes in putting in the elbow grease to understand the business.

Focus on the pricing power of a business.

Don’t act impulsively, but act!

Avoid herd mentality; it’s OK to be contrarian.

Bet big on your best ideas.

Be a long-term investor and an active investor.

Boy, a lot of those principles could be taken from a page in Warren Buffett’s playbook, couldn’t they? However, there are a couple of differences between Buffett and Icahn. Buffett is willing to hold a stock indefinitely, while Icahn will sell to lock in profits once value is realized. And Buffett likes to buy well-managed companies, while Icahn is OK with buying an underperforming business as long as it is trading at a discount to its net asset value.

George Soros

Another bold investment guru is George Soros, who has managed to rack up a net worth of more than $7.2 billion.

We may call him an investor, but in reality, Soros is a momentum trader or speculator, making massive highly leveraged bets on share price movement—up or down. He buys and sells, and he’s not averse to selling short (borrowing a security, selling it on the open market, and expecting to repurchase it for less money when the shares decline).

Soros runs a hedge fund with a global macro strategy, in which he commonly bets on the movements of currency rates, commodity prices, stocks, bonds, derivatives, and other assets based on macroeconomic analysis.

Soros is probably best known as “The Man Who Broke the Bank of England,” when he bet against the U.K. pound sterling in 1992—a feat that brought him a $1 billion profit. He did the same sort of play in 1997 with Asian currencies during the Asian Financial Crisis. It was an example of speculation gone rampant that caused the baht (the currency of Thailand) to collapse, and netted Soros double his $1 billion bet. And in the next decade, he bet against the Japanese yen (in 2013-14), taking home another billion dollars.

Like all investors, Soros has made some big mistakes, too.

• In 1999, he bet (too early) that the shares of internet firms would fall and lost $700 million.
• Betting that Trump’s 2016 election would cause the markets to fall, Soros lost $1 billion in the weeks after the election.
• In 2022, he lost $1.3 billion betting on electric vehicle maker Rivian (RIVN).

Soros’s investment strategy is based on the contrarian view that—unlike what my finance professors taught me—markets are not efficient. Instead, he doesn’t believe that all information is known to all market participants.

He calls this the principle of reflexivity, which says, “Markets can create their own successes or failures merely through the belief of investors. So, if investors continue to fund a money-losing business through tough times, they may eventually allow it to succeed. Similarly, if they withhold money from a struggling business, they may cause it to fail. So, belief can end up creating a self-fulfilling prophecy for the company, regardless of the reality.”

Soros looks at value, but he trades according to the movements of the financial markets and the irrational behavior of their participants.

Investopedia.com cites this example: “Housing prices provide an interesting example of his theory in action. When lenders make it easy to get loans, more people borrow money. With money in hand, these people buy homes, which results in a rise in demand for homes. Rising demand results in rising prices. Higher prices encourage lenders to lend more money. More money in the hands of borrowers results in rising demand for homes, and an upward spiraling cycle that results in housing prices that have been bid up way beyond where economic fundamentals would suggest is reasonable. The actions of the lenders and buyers have had a direct influence on the price of the commodity.

“An investment based on the idea that the housing market will crash would reflect a classic Soros bet. Short-selling the shares of luxury home builders or shorting the shares of major housing lenders would be two potential investments seeking to profit when the housing boom goes bust.”

The 2 Keys to Successful Investing That These Investors All Follow

So, what’s to be learned from these seven ultra-successful investors? While their investment strategies and approaches may significantly differ, they actually do have a couple of critical characteristics in common:

1. Price is king. Whether a value, growth, or cash flow investor, speculator, or trader, buying at the right price is key to success. The following graphic gives a nice contrast between value and price.

As you can see, a stock’s value is determined by earnings, market share, P/E ratio (and other metrics, such as Price/Book, and Debt/Equity), and the company’s competition.

Whereas a stock’s price is a function of supply and demand (are investors buying or selling?), broad market trends (bull or bear), the news media (right or wrong), analyst reports, economic factors (such as interest rates, growth, inflation, and credit), and company news.

2. Don’t let emotions lead your decisions. One thing I know from four decades in this business is this: Discipline is essential. There’s no place for panic, hope, and fear. Find your personal investing strategy and stick to it (unless it’s not working over the long term)!

My 5 Tips for Navigating Current Market Volatility

Know yourself and how much risk you can live with comfortably. This survey I created is a helpful way to determine if you are a conservative, moderate, or aggressive investor.

And to get a head start, here are the definitions:

Conservative: As a conservative investor, you are less willing to accept market swings and significant changes in the value of your portfolio in the short- or long-term. Capital preservation is your primary goal, and you may plan on using the principal from your investments in the near-term, preferably as a steady income stream. The average level of return you expect to see is 5%-10%, annually.

Moderate: As a moderate investor, you seek longer-term investment gains. You are comfortable with some swings in your portfolio’s performance but generally seek to invest in more conservative stocks that build wealth over a substantial period of time. The average level of return you expect to see is 10%-25% annually.

Aggressive: As an aggressive investor, you primarily seek capital appreciation and are open to more risk. Swings in the market, whether short- or long-term, do not impact your investment decisions and you have confidence that volatility is necessary to achieve the high return on investment you are looking for. You typically expect a 25%+ return, annually, though you do not need your principal investment immediately.

Diversify. I realize that there are many opinions—pro and con—on diversification. But let me just say this—for an average individual investor who holds maybe 15-20 stocks in his portfolio, diversifying between asset classes, market cap and industry will help mitigate risks during downtimes in the market (such as now). It’s the “don’t put all your eggs into one basket” theory.

Buy when there’s blood on the streets, in the words of 19^th-century financier Baron Nathan Mayer Rothschild (reiterated by Buffett, who says, “Buy when others are fearful”). In other words, when others are selling, it’s often the perfect time to buy at discounted prices. You just have to do your homework and make sure that the company is fundamentally strong and has excellent growth prospects.

And don’t worry; what goes down must come up, and you can look at the following chart of the Dow Jones Industrial Average over the last 10 years, to see that I’m right.

According to Charles Schwab, “The average bear market lasts 409 days and sees a market loss of 36%. But the average bull market lasts 1,866 days and sees the SPX rise 180%.”

And this chart from Stifel bears that out:

And those stats lead me to the next tip:

Stay invested. If bull markets last so much longer (4x!!!), why would you want to try to time the market?

Let’s look at another graph that shows you just how costly market timing can be, based on investing $10,000 in 1994:

In that 29-year period, if you missed just ten of the best days, your return was 54% less than being fully invested during the entire period. Dimensional Funds analyzed an even longer (50-year) period and found that just missing the best 15 days yields 35% less return.

Listen, I had friends I couldn’t talk out of cashing out their stocks during the 2008 market rout. And that has set them back many years of gains by doing so.

Bottom line—stay invested!

Monitor and rebalance your portfolio. No, you don’t need to obsess over it. But at least once every three months, you should review your portfolio. Some of your investments might have gone up or down significantly, and you may want to rebalance so that you don’t have too much of one (or one type of) stock.

If you follow these five tips, I have no doubt that you will find investing success.

Sample Stock/ETF Portfolios

Most financial planners recommend that investors tailor their portfolios around their age and risk tolerance, such as the ones I included in my recent Cabot Stock of the Month newsletter. If you took my Investor Survey, and now understand what type of investor you are, I think these ideas will be helpful to you:

Sample Portfolios

By Age:

By Personal Risk Tolerance:

3 ETF Ideas (Plus a Bonus ETF) for the Current Volatile Marketplace

Lastly, I want to leave you with some ideas for investments that may help you profitably weather the current market volatility. As always, please make sure these investments—and any others—fit your personal investing style and risk.

So, there you have it—there really is not just one investing strategy that is right for all investors. But it’s not that difficult to find the one that’s just right for you.

Happy investing!