One trait many great investors have in common is a willingness to share their knowledge. Peter Lynch, for example, has inspired hundreds of thousands with his must-read books. Warren Buffett, one of the greatest investors ever, lays bare his knowledge in his annual shareholder letters to Berkshire Hathaway investors. And the list goes on: Ben Graham, Philip Fisher, John Neff, etc.
Shannon Zimmerman, in his nearly two years at the helm of Motley Fool Champion Funds, has recognized the power of learning from the masters. He has regular conversations with the mutual fund industry's most talented investors and shares them with his members. Here are some of the great lessons he has culled:
"First, you've got to have a great business. It has to have something unique about it, some type of niche. Then we look at the financial metrics. Even though we're in the value camp, we want companies that are vibrant; that is, companies experiencing growth in sales and earnings. Our No. 1 metric is probably return on invested capital. If a company can continue to reinvest successfully, it will be much more valuable in the future."
-- John Fox, FAM Value (Top holding: White Mountains Insurance Group
"We look to buy companies everybody else is selling. We like to zig when everybody else zags. We are not trapped in a box, unlike most mutual fund managers who have to stay in an asset class, a [style] box, or a market-capitalization box. ... You know, we are not buying Taser or Netflix. We are buying what we call 'cold stocks.'"
-- John Buckingham, Al Frank Fund (Top holding: Valero Energy
"Our strategy is designed to build that broadly diversified portfolio of companies that are inexpensive relative to where they historically trade or relative to the overall market. The idea is to sit on them. Be patient. We are kind of like the tortoise in The Tortoise and the Hare. We plod along, and at the end of the race, we are happy with our position, even if in the short run we may not have a lot to show for it."
-- John Buckingham, Al Frank Fund
Q: "Someone once said that investing with you is like watching grass grow. Did you take that as a compliment?"
A: "I view that as a tremendous compliment. To me, grass grows in only one direction: up. And it may be, depending on the amount of moisture and sun, that sometimes it grows fast and sometimes it grows slower, but it grows. And that's fine with me."
-- Charlie Dreifus, Royce Special Equity Fund (Top holding: Banta
"We like to find stocks that are undervalued relative to the industry and relative to the market. Some of the valuation techniques that we pay attention to are cash flow generation and price to cash flow. We look at companies that have been able to finance their growth, particularly those that generate a lot of cash flow so they are more in control of their own destiny and less dependent upon Wall Street for their continued success. We like companies that have shareholder-oriented management and have proved to be shareholder-oriented in the past."
-- Chip Carlson, Greenspring (Top holding: Brooks Automation
"Because of our concentration on very strong balance sheets, we avoid the corporate distress. We don't mind market distress, though. There is nothing more interesting to us than a one-time 20% grower that is maturing into a 12% or 15% grower and, in the process, has lost its growth audience. We're looking to buy things that aren't necessarily going to do anything for us in the near term. But with the passage of time, the things we bought two years ago are providing today's performance. Our job today is to worry about what's going to work in [the future]." -- Whitney George, Royce Premier (Top holding: IPSCO
"[You must be] highly disciplined and non-emotional when it comes to your investment decisions. We look at everything like the real world. If emotion enters in a conversation, most likely that conversation is going to get ugly at some point in time. If emotion enters your investment decisions, most likely, at some point in time, it is going to turn ugly. It's just human nature. So we stay highly disciplined and non-emotional when it comes to the investment strategies."
-- Neil Hennessy, Hennessy Focus 30 (Top holding: JLG Industries
When to sell
"Generally there are three reasons we will sell a stock. The first is that the thesis works out, the stock has generated a nice return, and the business fundamentals have either stopped improving or they start to deteriorate again. At that point, I will likely sell a stock and, hopefully, have an alternative investment to make.
The second reason is that the thesis has worked out great, the return has been spectacular, and the business is still doing wonderfully well but I can't rationalize the valuation. The third reason to sell is if I determine that my investment thesis was incorrect." -- Kevin O'Boyle, Presidio (Top holding: UAP Holding
Foolish final thoughts
It's refreshing that the most successful stock pickers are so eager to share their insights and strategies. That's why I listen when they talk.
Every month, Shannon interviews a new master investor in his own quest to beat the market. He's applied that knowledge very well -- since inception, his Champion Funds recommendations have outpaced their benchmarks by more than 11 percentage points.
You can take a look at all of his recommendations, and receive the special report "All-Star Manager Interviews 10-Pack," as part of a free 30-day trial to Champion Funds.
Rex Moore nominates Vince Young for president. He owns no companies mentioned in this article. FAM Value and Royce Premier are Champion Funds picks. Taser is a Motley Fool Rule Breakers pick. Netflix is a Motley Fool Stock Advisor pick.The Fool has adisclosure policy.