The business focus of the great 20th century investors

We are occasionally asked what books we would recommend to those who wish to become better investors.

In general, we would argue that many if not most books written about "investing" that you find in the bookstore and library shelves are of little real value to the investor, and can in fact be downright harmful.

Because we view investing as the art and science of matching capital with business innovation(as we discuss here and here), we would advise investors to look for good books about business innovation rather than "investment" books per se.

However, we would also advise that investors become familiar with the thinking of some of the more successful investors from the twentieth century, particularly those who formed their investment philosophy prior to 1974. As we have explained in detail in previous posts such as "The poison of 1974" and "Beware of the witch doctors of modern finance," 1974 was a watershed year in which the entire focus of the investment world shifted towards the "modern portfolio theory" which dominates investing today.

As a result of that tectonic shift, the voices of the giants of twentieth-century investing can sound to the reader of today as if they are coming from another planet. The past year has exposed the flaws of the "modern" theories, however, and should serve as a wake-up call to the investment community to go back and examine what they threw away when they embraced the academic models and hypotheses.

The investment philosophies of the great twentieth-century investors differ from one another, of course, just as different styles of martial arts differ from one another in their approach to self-defense. However, we would argue that in spite of their differences, the styles of those pre-1974 investors had more in common with one another than with much of what is practiced today, because they were focused on ownership of businesses. The particular things that they looked for in a business may have differed, but they were united in having a business focus.

In contrast, those who espouse modern portfolio theory believe one can utilize algorithms to magically diversify away risk and maximize returns. Instead of focusing on individual businesses their strategy is more concerned with gaining exposure to various asset classes, "style" categories, geographies and capitalization levels, typically using mutual funds or ETFs. While it could be argued that these mutual funds or ETFs at least own securities issued by businesses, we have demonstrated that the very structure of the large asset-management pools (such as mutual funds) tends to force their managers towards a shorter-term approach based on the movement of the "market price prospects" of a stock rather than a longer-term approach that is based on the business prospects of a company (see the discussion in "The further you are from owning individual companies," published in November, 2007).

Thus, we would argue that the investment approach taken by great twentieth-century investors such as as Philip Fisher (1907 - 2004), John Templeton (1912 - 2008), Philip Carret (1896 - 1998) and Thomas Rowe Price (1898 - 1983) are actually more similar to one another than they are to much of what takes place in the big mutual fund companies (some of which even bear their names).

The writings and thoughts of these men can serve as an antidote to much of what the financial world and media typically focus on from day to day. Consider these selections for starters:

• "Fear of having too many eggs in one basket has caused them [investors] to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all. It never seems to occur to them, much less to their advisors, that buying a company without having sufficient knowledge of it may be even more dangerous than having inadequate diversification" (Philip Fisher, Common Stocks and Uncommon Profits, 129).

That observation, published in 1957, is a stinging indictment of much of the "deworsification" that caused investors so much pain in 2008 (further discussion of the impact that had during 2008 is available here and here).

• "Achieving a superior record takes much study and work, and is a lot harder than most people think" (John Templeton, Time-tested Maxims #2). This thought is closely related to the following quotation from Philip Carret.

• "Seek facts diligently, advice never" (Philip Carret, cited in Glassman's "Learning from the Long Men").
  

• "More fortunes are made by sitting on good securities for years at a time than by active trading" (Philip Carret, cited in Glassman's "Learning from the Long Men").

This last maxim is strikingly similar to a belief held by Thomas Rowe Price, with whom the late Richard Taylor managed money and from whom the investment discipline at Taylor Frigon is directly descended. As we have noted several times previously, he told investors:

• "Most of the big fortunes of the country were made by men retaining ownership of successful business enterprises which continued to grow and prosper over a long period of years" (Thomas Rowe Price, "A Successful Investment Philosophy based on the Growth Stock Theory of Investing," 1973).

We would advise investors who are not familiar with the successful "pre-1974" investors to take the time to become familiar with them, and most importantly to rediscover the business focus that they had and which much of the investment world has lost.

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