In a recent roundtable discussion with Forbes, powerhouse investor Jeremy Grantham of Grantham, Mayo, van Otterloo & Co. recommended that investors limit their risk.
That's great advice, especially in today's market. But how can we lower risk while generating returns? Doesn't finance theory say that we have to increase risk to increase returns?
Finance theory? Bah!
That's certainly one way to think about it, but not the best way. Why take more risk than is necessary, particularly if, as Grantham believes, you're not being compensated for it? There's a better way to generate great investment returns, and great investors such as Grantham, Bill Miller, and Wally Weitz know it.
Simply demand:
- The highest quality
- The lowest price
Yes, the thinking is that simple. The execution, however, is more difficult. Quality comes in many forms, and the stock market doesn't always provide low prices.
Defining quality
When I think of quality, I think of great brand names, great management teams, and great prospects. Getting the lowest price requires being patiently opportunistic, something very difficult to do in today's gotta-have-it-now culture. But patience will be rewarded with the highest margin of safety, the difference between an estimate of intrinsic value and a company's stock price.
As I said, quality can be difficult to define. So here are some of the quality companies these three great investors have been buying recently:
- Jeremy Grantham likes financial services powerhouse Citigroup (NYSE: C) and networking giant Cisco Systems (Nasdaq: CSCO).
- Bill Miller thinks General Electric (NYSE: GE) and American Insurance Group (NYSE: AIG) offer compelling values.
- Wally Weitz has initiated positions in direct PC seller Dell (Nasdaq: DELL) and worldwide content producer News Corp. (NYSE: NWS).
Clearly, these investors think big companies offer attractive investments. But the high-quality, low-price model works regardless of size. Inside Value lead analyst Philip Durell used the same thinking to recommend the much smaller ($1 billion market cap) payday lender Advance America (NYSE: AEA). Who knew that size doesn't really matter?
The Foolish bottom line
So that's it: Buy high quality at low prices. Mix those factors with a little patience (like Grantham advises as well) and you've got a recipe for generating extraordinary wealth over time.
If you'd like some help finding quality at low prices, try our Inside Value investing service free for 30 days. We specialize in finding quality companies trading at large discounts to their intrinsic value, and you can see all of our stock picks free for 30 days. Just click here for more information. There is no obligation to subscribe.
Inside Value team member David Meier worked for General Electric for seven years and has a beneficial ownership in the company. Dell is both an Inside Value and a Stock Advisor recommendation. The Fool takes its disclosure policy very seriously.
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