The best investors are always learning, reading, thinking, and even disproving their best and most fundamental beliefs. Today, I'm going to discuss three of the investors I like to follow.
First is Bill Miller of Legg Mason Value Trust (FUND: LMVTX ) fame -- the man who whopped the market for 15 straight years. While that streak ended in 2006, Legg Mason Value Trust has outpaced the S&P 500 and returned 7.8% annually over the past five years. The smart money wouldn't bet against Miller for long.
Among Miller's largest holdings as of Dec. 31 were Google (Nasdaq: GOOG ) , Sprint Nextel (NYSE: S ) , AES (NYSE: AES ) , Amazon.com (Nasdaq: AMZN ) , Qwest (NYSE: Q ) , and Tyco International (NYSE: TYC ) .
A decade-and-a-half streak of market-beating returns doesn't happen by chance. Miller recently reflected on some of the reasons for his streak.
- Mastering behavioral finance. He minimizes exposure to social and psychological errors that have been identified by behavioral finance researchers such as Kahneman and Tversky. You see, humans aren't born to be great investors. We come preprogrammed with a set of cognitive filters that served cavemen well. Unfortunately, may of those human tendencies are counterproductive to our capital allocation efforts.
- Being rationally opportunistic. Miller takes advantage of Mr. Market's mood swings, knowing full well that price is what you pay and value is what you get. Usually, stock prices overreact to both good and bad news. Rational investors can take advantage of this manic behavior.
- Employing a bottom-up approach to stock picking. Miller's success involved building a portfolio of stocks based on their risk-adjusted rate of return. The best companies are selling at a significant discount to their long-term intrinsic value.
Two other masters you can learn from
Fool co-founders David and Tom Gardner have an impressive track record in the nearly five-year history of their Motley Fool Stock Advisor service. Their cumulative recommendations have returned 22.8% per year, as reported by Hulbert Financial Digest. How did they do it? Let's take a look.
- Focus on value. Neither David nor Tom is constrained by a strict methodology for selecting great companies at reasonable prices. David's best recommendation to date is Marvel Entertainment, up more than 700% since his initial pick. By any value measures, it wasn't cheap when he recommended it. While the intellectual property this company controlled was immensely valuable, it wouldn't jump out at you from reading the financial statements.
- Diversify, but double-dip when opportunity strikes. Each month David and Tom recommend the best company they can find. On 17 occasions, Tom has recommended a previous selection. David has double-dipped 15 times. Those re-recs are up an average of 80.5%.
- Leadership matters. Insiders own 11.7% of the average David recommendation. Tom's management teams own an average 13.6% of their companies. Shareholder-friendly management is a key component for investing success.
Keep your eyes on the prize
Two more key traits of successful investors are patience and discipline. The market can be awfully noisy sometimes, and as the investing legends have shown, staying disciplined is critical to achieving your investing endgame.
I'll end with some words Tom and David wrote in an early Stock Advisor issue:
"Most of all we encourage you to focus on individual stocks, not the 'overall stock market.' Investors who buy and hold good companies they understand, as we have been teaching for 10 years now, will likely continue to beat up on the stock market, as we have at Motley Fool Stock Advisor from the outset."
You can profit a lot just by listening to the masters. If you would like to hear from David and Tom Gardner each month and start your own streak, you can join Stock Advisor free for 30 days. Just click here for more information.