Take Your Place Among Investing's Greats

When asked for self-improvement advice, Warren Buffett suggested that we think about someone we greatly admire, ponder what they do and how they are, then simply try to follow suit. That sounds wise to me -- and the same common-sense advice can easily apply to investing.

To improve our own investing, it probably wouldn't hurt us to learn how the world's great investors have gone about getting rich. Why should we try to reinvent the wheel, when there are blueprints all around us? I've compiled a few strategies from noted investing luminaries; perhaps you'll see one you'd like to adopt for yourself.

Benjamin Graham
Graham was Warren Buffett's teacher and mentor, devoted to the notion of buying stocks for considerably less than he thought they were worth. Buffett himself adopted this style, though he later increased his focus on the quality of the undervalued company.

Figuring out what a stock is really worth can involve a lot of complicated number-crunching. However, a stock screen can help you collect leads for further research. I recently looked for large-cap stocks with price-to-earnings ratios and price-to-book ratios below industry averages. Here are just a few of the candidates I found:

Data from Capital IQ, a division of Standard & Poor's.

You can learn a lot from Graham's books. His Security Analysis (1934) and The Intelligent Investor (1949), the former written with David Dodd, remain in print, and they're considered must-reads by serious investors. (The Intelligent Investor makes a great place to start.)

Much of Graham's advice has stood the test of time very well, including this tidbit: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." That herd mentality can often drive people to sell in panics and buy during bubbles, making Graham's warning all the more worthwhile.

Peter Lynch
The acclaimed former manager of Fidelity's Magellan fund has penned several great books on investing, so it's easy to soak up much of his wisdom. Here's one nugget I particularly like: Lynch likes to invest in "simple" businesses that "can be run by monkeys" -- because eventually, they will be. (I, for one, welcome our future primate overlords.)

Lynch's monkey-related maxim is a good reminder for all investors to stick to what we know and understand. Think of PepsiCo, No. 2 worldwide in soft drinks, and No. 1 in salty snacks. Odds are, you can grasp its business model much more easily than, say, that of a biotechnology or alternative energy company. You already have a fair idea of its competitive position and its strengths, along with the kind of growth you can expect from it. Buy such companies at attractive prices, and you'll likely sleep far better than you would when worrying about a company whose business you don't really understand.

T. Rowe Price
The man behind the well-respected mutual fund company that bears his name was a talented investor. Price liked to look for the best companies in growing industries; he also sought opportunities among cyclical companies whose fortunes were closely tied to the economy.

John Train's book, The Money Masters, discusses some of the things Price would look for in a company:

• A record of earnings growth -- with the understanding that rapid growth slows down as a company gets bigger. Price might have fancied Oracle, which has grown its revenue by more than 18% annually over the past five years.
• Companies that are out of favor, since they can offer more compelling prices. For example, Starbucks (NASDAQ:SBUX) has earned many investors' scorn as it shutters hundreds of locations.
• Blue chips with records of regular dividend increases. PepsiCo has averaged more than 20% dividend growth over the past five years.

Price's ideal qualities resemble the same criteria sought by our Inside Value newsletter. To find high-quality companies, they also recommend you focus on trust-inspiring management, robust earnings and revenue growth, hefty profit margins, sustainable competitive advantages, and a healthy balance sheet, among other virtues.

Invest like the best
Despite the recent market rally, now remains an extremely promising time to seek great values; some of my colleagues call it a once-in-a-lifetime opportunity. Combine that rare chance with the stock-picking secrets of our greatest investors, and one day, history might save you a spot in their pantheon.

If you'd like some pointers toward a host of stocks that our analysts believe are significantly undervalued, try Motley Fool Inside Value, on the house. Even in this turbulent environment, their picks are beating the market on average. Get instant access to every issue and all past recommendations free for 30 days.

Longtime Fool contributor Selena Maranjian owns shares of PepsiCo, Home Depot, and Starbucks. Starbucks is a Motley Fool Stock Advisor selection and a Fool holding. Starbucks and Home Depot are Motley Fool Inside Value recommendations. PepsiCo, is a Motley Fool Income Investor recommendation. The Motley Fool's disclosure policy shares Charlton Heston's warm feelings toward the concept of ape overlords.