Table Of ContentL
E S S O N S
f r o m t h e
L
E G E N D S
o f
W S
ALL TR EET
How Warren Buffett,
Benjamin Graham, Phil Fisher,
T. Rowe Price, and John Templeton
Can Help You Grow Rich
Nikki Ross
, CFP
The objective of this publication is to provide accurate and authoritative information in
regard to the subject matter covered. However, it is sold with the understanding that nei-
ther the publisher nor the author is hereby providing legal, accounting, financial, and/or
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©2000 by Nikki Ross
Published by Dearborn, a Kaplan Professional Company
All rights reserved. The text of this publication, or any part thereof, may not be repro-
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Printed in the United States of America
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Library of Congress Cataloging-in-Publication Data
Ross, Nikki.
Lessons from the legends of Wall Street / Nikki Ross.
p. cm.
Includes index.
ISBN 0-7931-3715-2
1. Capitalists and financiers—United States—Biography. 2. Investments—
United States. 3. Wall Street. I. Title.
HG172.A2 L47 2000
332.6—dc21 00-022354
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Advance Praise for
Lessons from the Legends of Wall Street
“Provides unprecedented insights into the best financial minds
of our time . . . must reading for all investors.”
Christopher L. Hayes, Ph.D.
Founder and Director, National Center for Women & Retirement Research
“All investors can benefit from studying how others have made
fortunes in the market, and Lessons from the Legends is an
excellent way to discover the strategies of five of America’s best known
stock market investors. Use this book to see how you can adapt the
strategies of Graham, Buffett, Price, and the others to help your own
portfolios. You will surely benefit from it.”
Stephen Sanborn
Director of Research, Value Line Publishing, Inc.
“Over a 35 year career in equity investing, I have come across
few books which I have found to be useful. This book is one
of the few. It belongs on my very short list of recommended
reading for any serious investor.”
Philip K. Swigard
Berkshire Hathaway Shareholder and Private Investor
“If you want to understand literature, you study the great authors;
music, the great composers. Why, then, do most investment courses
ignore the great investors and instead preach the efficient market
theory, which tells us no one can beat the market and ignore those
who do? Thankfully, Nikki Ross’s Lessons from the Legends of Wall
Street helps to right the score. You’ll find more practical advice in
this one book than in a dozen academic investment texts.”
Don Phillips
CEO, Morningstar, Inc.
“Well done! An excellent book for the investing public. The blend of
biography and academic text is unique. It makes learning more fun.”
T. Wayne Whipple, CFA
Executive Director, The New York Society of Security Analysts, Inc.
“Articulating lessons from the deans of the investment world, this
wonderful how-to book is a remarkable resource for investors.”
Bernadette B. Murphy
Chief Market Analyst, Kimelman & Baird LLC and
Regular panelist on Wall $treet Week With Louis Rukeyser
“The markets always remind us of the necessity of wise investment
counsel. The insights offered by the investment Dream Team put
together by Nikki Ross are as timely as they are brilliant. The
wisdom and insights of these five legends can help consultants,
money managers, financial advisors, stockbrokers, and most
importantly the investor, develop successful investment strategies.
I thoroughly enjoyed reading this outstanding and informative
book and recommend it to all types of investors.”
Michael T. Dieschbourg
CIMA, Consulting Group, Salomon Smith Barney
“Nikki Ross has meticulously mined the gold from some of
the richest veins in modern times—and has refined it in a way
that makes it valuable for all who want to invest intelligently.
She’s made required reading for the experienced investor
understandable for the novice.”
Ellis Traub
Chairman, Inve$tWare Corporation
“Entertaining and informative, five legendary investors speak
to you through Nikki Ross. She details the strategies they used
to acquire and preserve their fortunes and explains how you can create
your own blueprint for wealth. I highly recommend it.”
Gail Liberman
Syndicated columnist and author of Rags to Riches: Motivating Stories of
How Ordinary People Achieved Extraordinary Wealth!
Dedication
To God, the giver of all wisdom
To my husband, Joseph, for his love
To my mother, Claire, for her courage
To my brother, Richard, for his devotion
Contents
Preface ix
Part I. Warren Buffett: The Super Combination Investor
1 Buffett’s Success Strategies: Building Real Wealth with
Commonsense Investment Rules and Compound Returns 5
2 Buffett Applies the 3 Steps: Getting Insights from
Annual Reports 12
3 Buffett Applies the 3 Steps (continued): Getting Insights
from Stock Research Reports 20
4 GEICO Revisited 32
5 Applying Buffett’s Strategies for Different Types
of Investors 38
6 The Ultimate AnnualMeeting 40
7 The Life and Career of Warren Buffett 43
Part II. Benjamin Graham: The Value Numbers Investor
8 Graham’s Success Strategies: The Cornerstones
of Investing 51
9 Graham and His Followers Apply the 3 Steps:
Going Bargain Hunting for Undervalued Stocks 57
10 21st-Century Value Investing with John Spears
and Mason Hawkins 74
11 Applying Graham’s Strategies for Different Types
of Investors 82
12 The Life and Career of Benjamin Graham 84
Part III.Phil Fisher: The Investigative Growth Stock Investor
13 Fisher’s Success Strategies: Evaluating a Company’s
People, Products, and Policies 93
vii
viii Contents
14 Fisher Applies the 3 Steps: Getting the Scuttlebutt 95
15 Motorola Revisited 106
16 Applying Fisher’s Strategies for Different Investment Types 113
17 Thorns and Roses: Learning fromInvestment Mistakes 117
18 The Life and Career of PhilFisher 119
Part IV. Thomas Rowe Price: The Visionary GrowthInvestor
19 Price’s Success Strategies: Think Like a Business Owner, but
Be Aware That “Change Is the Investor’s Only Certainty” 129
20 Price Applies the 3 Steps: Examining the Growth and
Life Cycles of Companies 132
21 Applying Price’s Strategies for Different Types of Investors 148
22 Current and Future Investment Trends: Technology,
Health Care, and Financial Services 161
23 The Life and Career of Thomas Rowe Price 164
Part V. John Templeton: The Spiritual Global Investor
24 Templeton’s Success Strategies: Foresight, Patience,
and the Contrarian View 177
25 Templeton Applies the 3 Steps: Worldwide
Comparison Shopping for Stocks 180
26 Templeton’s 15 Commonsense Rules for
Investment Success 187
27 The Evolution and Importance of Global Investing 194
28 Applying Templeton’s Strategies for Different Types
of Investors 201
29 Templeton’s Positive View: The Future of Free Enterprise
and the Stock Market 204
30 The Life and Career of JohnTempleton 208
Part VI.Creating Your Own Wealth Plan
31 How You Can Apply a Composite Version of the 3 Steps
and Project Potential Investment Returns 213
32 How You Can Build and Preserve Real Wealth 226
Endnotes 251
Index 259
Preface
SPEAKINGATANinvestment management conference in Miami, Florida,
John Templeton, predicted, “The Dow Jones Industrial Average will
be over 1,000,000 by the end of the 21st century.” I noticed the raised
eyebrows, wide-eyed expressions, and quizzical looks of some in the
audience, yet from a historical perspective his rationale is realistic. At
the beginning of the 20th century, the Dow was approximately 100 in
round numbers and on the day he spoke, November 18, 1999, the
Index was 10,600, an increase of over 100 times. If the Dow increases
by the same amount in this century as the last, it will reach 1,000,000
by the year 2099.
Although Templeton was optimistic about the future of the stock
market, he warned, “Be prepared [emotionally and financially] for 21st
century bear markets.” Generally, bear markets are defined as market
declines of 20 percent or more and can be caused by various factors,
such as higher inflation and interest rates, lower corporate earnings,
and a negative change in investor psychology (for details of Temple-
ton’s speech, see Chapter 29). Templeton’s warning was timely, because
signs of a bear market appeared in the spring of 2000.
Even if you invest when the market is going up, you may not be
in the right stocks. According to Anthony Dwyer, a market strategist
with a Wall Street brokerage firm, the Dow rose 25 percent in 1999,
ix
x Preface
but 60 percent of the stocks on the New York Stock Exchange did
not increase.1
How This Book Can Help You
The wisdom of five legendary investors is condensed into three vital
steps for investing, along with advice on how you can apply their strat-
egies in any market climate—up, down, or sideways. You will find
information to help you make better investment decisions, whether
you are a novice or a sophisticated investor, buying individual stocks,
mutual funds, or employing a money manager.
You may be familiar with one or more of the legends featured;
however, this book contains updated, modern applications of their
strategies. Chapters about them provide different, essential investing
knowledge and principles that can be combined to create a sound
investment plan:
• Warren Buffett, a self-made billionaire who created an extra-
ordinary long-term investment track record, gives insights
about how to profit from reading annual reports and what to
look for in stock research reports.
• Benjamin Graham, the father of value investing who became
rich by developing and applying criteria for security analysis,
explains the important financial numbers and ratios necessary
to evaluate a company. Graham’s followers give expanded
criteria for 21st-century investing.
• Phil Fisher, who made his fortune with a detective-like invest-
ment method, tells how to pick stocks with tremendous profit
potential by evaluating a company’s top executives, products,
and policies.
• Thomas Rowe Price, a futurist who acquired his fortune
investing in growth stocks and applying the life-cycle theory
of companies (birth, maturity, decline), discusses the warning
signals of slowing growth and the trends affecting stocks.
Money managers at T. Rowe Price Associates, the mutual
fund group Price founded, update and expand his advice.
• John Templeton, the dean of global investing and founder of
the Templeton Funds and the Templeton Foundation, who
