How Billionaires Invest

When I look at Forbes' list of the world's billionaires -- a.k.a. the list of people who make more in a day than I have in my entire lifetime -- it becomes quite clear that there are two ways to make stupidly large amounts of money: Either build a company that grows to be worth billions, or become a successful investor.

Frankly, creating a billion-dollar business sounds hard. So let's ignore Bill Gates and look at Nos. 2 and 3 on the list. There, you find Warren Buffett and Carlos Slim.

A tale of two billionaires
Now, most people know Buffett. He's a value investor who walks right by the overhyped, exciting investments and heads straight for the boring, ugly, beaten-down stocks in the bargain bin. He buys newspapers. And paint and carpet companies. And, when he's feeling particularly frisky, he'll buy an underwear manufacturer.

Yet this fellow made himself billions. Go figure.

Mexico's Slim came in third on the Forbes list (which was published in February), but has since overtaken Gates and Buffett. Slim is far less familiar than Bill and Warren. He's noteworthy not just for his $60 billion-plus fortune, but also as the person who gained the most wealth in 2006 ($19 billion). To make that money, surely Slim would have to be in some really exciting businesses?

Umm, no. Slim has been in cigarettes, real estate, soda bottling, auto parts, and insurance. His bread and butter is South American telecoms like America Movil (NYSE: AMX), but he's also owned stodgy companies such as Altria (NYSE: MO).

How they did it
So how the heck did these guys make so much money in such boring industries? By following two simple rules:

1. Buy companies when they're cheap.
2. Focus on excellent businesses.

Buffett made a fortune when he bought loads of American Express at incredibly low prices in the wake of the 1960s salad oil scandal. He recognized that the company still had a solid brand and was dirt cheap. Over the years, Buffett has made a habit of buying great companies at good prices, including Comcast (Nasdaq: CMCSA), Moody's (NYSE: MCO), and Wal-Mart (NYSE: WMT).

Slim's first huge opportunity came during Mexico's economic crisis in 1982. When international investors fled in panic, Slim noted that "the low value of many enterprises was even more irrational than the pessimism in the business community." He bought and reaped immense profits.

At this point, Bill Gates is looking kind of lonely, so let's go back to him.

Everyone knows that Gates made his billions by founding Microsoft. But if you've ever looked at his personal stock portfolio, the names would surprise you. For instance, Gates owns a stake in Canadian National Railway (NYSE: CNI), Canada's largest freight railroad. At this point, it should be obvious. Bill Gates is into boring value stocks, too.

The Foolish bottom line
Now, there's a reason that three of the world's richest men are value investors. It's because they know that value investing simply outperforms all other types of investing.

That's why it pays to always be on the lookout for value stocks, particularly when the market gets volatile. Buffett and Slim made some of their most successful investments by buying when everyone was panicking. You can, too.

If you're looking for assistance identifying the best opportunities, our Inside Value newsletter can help. Every month, we recommend the two best value stocks we can find. You can see all our recommendations -- including this month's top picks -- with a free pass here.

This article was originally published on April 2, 2007. It has been updated.

Fool contributor Richard Gibbons would make the list if they would just expand it by another 500 million people. He does not have a position in any of the stocks discussed in this article. Wal-Mart and Microsoft are Inside Value recommendations. Moody's is a Stock Advisor selection. The Motley Fool has a disclosure policy.