Forbes recently released its list of the world's billionaires, and, no surprise, a significant number of the folks on the list made their fortunes by investing. That subset includes Warren Buffett (worth $52 billion), Carl Icahn (worth $14.5 billion), and Jim Simons (worth $5.5 billion).
So, here's Important Lesson No. 1: You can make a lot of money if you learn to manage your portfolio like a pro.
Easier said than done ...
Of course, that collection of billionaire investors volunteers no clues about the strategy that's most likely to make you a billionaire. Buffett is a dyed-in-the-wool value investor. Using that strategy has helped him achieve annual returns greater than 20% at Berkshire Hathaway for more than 40 years on investments in boring companies such as GEICO and Washington Post. It continues in his portfolio today with USG (NYSE: USG ) , American Standard (NYSE: ASD ) , M&T Bank (NYSE: MTB ) , and other holdings.
Simons, though, can point to 34% annualized returns at his Medallion fund since 1982, net of what are believed to be some incredibly stiff fees. His is a mechanical strategy based on computer models that are constantly refined by an army of Ph.D.s.
So, while there is no single, best strategy, Important Lesson No. 2 is obvious: You gotta dance with the one that brung ya.
Colloquialisms aside, what's made these investors astoundingly successful is that they:
- Know how they make money best.
- Stick with their strategy in good times and bad.
- Refine their best practices over time.
Buffett was mocked during the technology bubble, when companies that he avoided and professed not to understand as well as others, such as Amazon.com (Nasdaq: AMZN ) and Hewlett-Packard (NYSE: HPQ ) , were zooming to the moon. And while Amazon.com has been a great performer, Buffett's doing just fine today.
Icahn has a reputation as a corporate raider. He's made a lot of money instituting changes at underperforming companies and recently bought a stake in Genzyme (Nasdaq: GENZ ) . Although his recent efforts at Time Warner weren't as successful as past efforts, Icahn has said he'll be patient. After all, he's worth nearly $15 billion. Why mess with success?
And Simons doesn't try to analyze businesses the way Buffett does because that's not where his expertise lies.
Mimic the masters
The secret to successful investing, then, is not in a single strategy, but in picking the strategy that's right for you and executing it faithfully. As lauded NYU finance professor Aswath Damodaran writes in his book, Investment Fables, "Each strategy has the potential for success if it matches your risk preferences and time horizon and if you are careful about how you use it."
That's it. That's the secret. Because if you get too cute -- chasing hot sectors, buying high and selling low, and only giving yourself six months or less to master a given investment strategy -- you're simply setting yourself up for failure.
Allow me to introduce ... myself
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This article was originally published Sept. 30, 2006, as "Join the Billionaire Boys Club." It has been updated.
Tim Hanson owns shares of Berkshire Hathaway. Berkshire Hathaway and USG are Inside Value choices. Amazon.com, Berkshire, and Time Warner are Stock Advisor recommendations. The Motley Fool holds stock in Berkshire Hathaway. The Fool's disclosure policy assures you that no stocks were harmed in the writing of this article.