By VW Staff
The Forbes special 2014 Investment Guide features the smartest plays from the world's best market minds as well as the best buy ETFs which will save you thousands of dollars over decades, and twelve ways to avoid the 3.8% ObamaCare tax. We distilled the timeless wisdom of twenty of the world's smartest investment gurus, including Carl Icahn, Warren Buffett, Sam Zell, David Tepper, and John C. Bogle, into specific suggestions for stocks, bonds, and funds to buy today. For the complete guide, visit www.forbes.com/investmentguide. Below are all twenty gurus.
Investment guide: World's Twenty Smartest Investment Gurus
When Jack Bogle launched the first retail stock index fund, the Vanguard 500, in 1976, it was derided by some as "Bogle's Folly." But thanks to a 1996 heart transplant, Bogle has lived to see widespread acceptance of his disruptive idea - that since you can't beat the market, low costs are all that matter. The Vanguard Group is now the world's largest mutual fund family, with $2.6 trillion under management.
John Templeton, a committed contrarian, believed the only way to get a bargain in the stock market was to buy when everyone else was selling: At the outbreak of World War II, when everyone else was panicking, he bought shares in every NYSE-listed company that was trading for less than $1 - and made money on nearly all of them. He was early to see the benefits of diversifying outside of America; international investing became his signature style. It worked: $10,000 invested in his flagship fund in 1954 grew into $2 million by the time Templeton retired in 1992.
Buffett's mentor, Ben Graham, taught his disciples that you weren't buying stocks, you were buying businesses. And sometimes "Mr. Market" was willing to sell those businesses for less than they were really worth. That was the signal to buy. Buffett has adhered to this value-investing philosophy since the 1950s, and it's the basis of his $65 billion fortune. Some big hits: American Express Company (NYSE:AXP), The Walt Disney Company (NYSE:DIS), Washington Post, Capital Cities/ABC, The Coca-Cola Company (NYSE:KO) and Geico.
Nathan Mayer Rothschild
Nathan Mayer Rothschild's father planted the seeds for the 19th century's greatest banking empire by stationing each of his five sons in different European cities. Nathan got London, but throughout his career he was able to profit from the insights of his brothers in Frankfurt, Paris, Naples and Vienna.
Sam Zell looks for down-on-their-luck companies that he can buy cheaply, and he is not afraid of debt. It's the anti-Buffett approach: Find poorly managed companies with shoddy balance sheets and you'll have lots of upside if they turn around. In the late 1960s, Zell also pioneered the residential REIT structure, which allowed ordinary investors to buy shares in apartment buildings, bringing Wall Street-style liquidity to the real estate markets. A rare miss: His 2007 purchase of newspaper publisher Tribune Co. ended in bankruptcy.
Joseph Schumpeter's great insight - which he termed "creative destruction" - was that economic innovation is fueled by entrepreneurs who discover better ways of doing things (the creative part), and their success leads to the collapse of old companies and methods (the destruction). Autos replaced horse-drawn buggies; word processors supplanted typewriters; the Internet killed print ads. The trick is to be on the right side of history.
Peter Lynch turned Fidelity's Magellan Fund into one of the world's largest mutual funds in the 1980s by logging a compounded average annual return of 29%. His secret sauce: stocks with historically low price/earnings multiples, avoiding companies with hypergrowth and ignoring market forecasts. His commonsense picks worked brilliantly and spawned a generation of boots-on-the-ground DIY analysts. After his amazing 13-year market-beating streak ended in 1990 with a 4.5% loss, he retired.
During the period when America was an emerging market, Hamilton was a tireless advocate for responsible federal finances. He knew that a strong central government was a prerequisite for robust economic growth. Lesson: Don't buy.
Quit Goldman Sachs in 1992 to found his own hedge fund. As a distressed-bond investor he has a record of making clearheaded moves in environments of fear and misinformation. David Tepper paid attention to Treasury department statements promising to backstop the big financial firms and in the five years after Lehman's collapse generated annualized net returns of nearly 40%.
Hetty Green inherited $5 million at age 30, and by the time she died in 1916, she had turned it into $100 million, making her the richest woman in the nation. How? One: She was unbelievably cheap, refusing to use hot water, wash her clothes or provide her son with decent medical care. Two: a flint-eyed instinct for a bargain, favoring income from distressed loans and discounted government bonds. She only bought stocks in financial panics.
The eventual founder of Babson College was educated as an engineer at MIT but taught himself statistical analysis while recuperating from tuberculosis. Roger Babson bought a typewriter, developed a market index based on Newton's law of action and reaction (lower prices must follow higher prices and vice versa) and attracted 30,000 newsletter subscribers.
Carl Icahn rose to prominence as a corporate raider in the 1980s, taking hostile control of underperforming companies and ruthlessly cashing in. Now he's been reincarnated as an activist investor, but underneath, the leopard has the same spots. His current MO: Take a minority stake in a listed company, demand board seats and aggressively agitate in the interest of shareholders. Management is often not amused, but the stock usually pops.
John Maynard Keynes
Although John Maynard Keynes is known for pioneering macroeconomic theory, he was also a great investor. Throughout the 1920s he was an avid speculator, gambling on currencies and commodities. Later he moved into stocks, eschewing the "animal spirits" of an irrational market for companies with good long-term prospects. Despite being nearly wiped out three times (1920, 1929, 1937), he achieved a 16% annualized return between 1922 and 1946.
A 20-year veteran of the Boston Fed and a former member of the President's Council of Economic Advisers who now teaches at Boston College, Alicia Munnell sounded the alarm early that Americans weren't saving enough for retirement. A longtime advocate of pushing people to save through automatic enrollment in 401(k) plans, she recently has become concerned that overly spooked retirees won't spend enough to maximize their well-being.
Unless you are a genius on the order of Warren Buffett or Peter Lynch, picking individual winners is next to impossible. So Jeremy Grantham focuses on Broader Slices Of The Market: He had massive success with small caps in the 1970s and international value stocks in the 1980s. Lesson? Stop trying to be a stock picker, and look for value on a grander scale.
Thomas Rowe Price
Thomas Rowe Price graduated from Swarthmore College with a chemistry degree and worked as an industrial chemist in his twenties before becoming a stockbroker in Baltimore at the predecessor firm to Legg Mason. He loathed selling stocks for a commission and in 1937 launched his own firm, charging an advisory fee based on assets managed - a radical concept at the time.
Another departure from convention was Price's growth style of investing, which sought out stocks with earnings and dividends rising faster than inflation and economic growth. Some stocks are better than others, he reasoned, while the prevailing view held that stocks fluctuate en masse with the economic cycle. Price enjoyed big early scores in General Electric Company (NYSE:GE), International Business Machines Corp. (NYSE:IBM) and 3M Co (NYSE:MMM).
The Hungarian hedge fund legend and global macro pioneer George Soros, has made a career by anticipating currency crises. His bet against the Japanese yen helped make him the highest-earning hedge fund manager in 2013, with a personal windfall of $4 billion. Bases his bets on his home-brewed "reflexivity" social theory, which postulates feedback loops in the market when investors chase higher prices, causing bubbles.
Friedrich Engels was born rich - the heir to a cotton fortune - and he loved the good life: champagne, foxhunting, late-night soirees - all while delivering a withering critique of capitalism. He coauthored The Communist Manifesto with Karl Marx in 1848 and financially supported him - to no one's surprise, he was bad with money - while Marx wrote his magnum opus, Das Kapital.
After being unceremoniously fired from the $12 billion TCW Total Return Bond Fund in 2009, Jeffrey Gundlach got his revenge by founding DoubleLine Capital, which is now more than four times bigger than his old fund, with $50 billion in assets. A Dartmouth philosophy and math major, Gundlach is a big thinker with a bloodless, contrarian approach who doesn't fall in love with his positions: "You have to be able to abandon your old friends."
William F. Sharpe
William F. Sharpe best-known academic work illustrates the relationship between risk and expected returns. The famous "Sharpe ratio" gauges whether portfolio gains are the result of a manager's investment skill or excessive risk-taking. Pro tip: There isn't a lot of "skill" out there.
Full list here
Inside Forbes: Investment Guide 2014
Elusive Editor Michael Noer goes through 5 of the top stories from the current issue of Forbes.