How to be a successful 'piggyback' investor

Why spend years honing your own successful investing style when you can hijack the ideas of an investment guru with a great track record? Here's how to do it.

When looking to develop a successful investing style, there is often no need to reinvent the wheel. Instead, many investors choose to copy an investing style that has been mastered by one of the great investors of the last century.

Even a great investor such as Warren Buffet had mentors – in his case, it was Benjamin Graham and Phil Fisher.

Ordinary investors can also learn a lot from reading the ideas of successful investors. Many of the fund managers we hear from cite reading widely as a key component of learning about investing.

However, some investors take this even further, adopting an investment style of someone with a great track record, or at least adopting aspects of their investment philosophy to their investing style.

Here, we run through five styles and how investors can adopt them. The strategy is certainly not risk-free, but offers food for thought.

Quality Investing - Warren Buffett

Warren Buffett is widely recognised as one of the world's most successful investors. From 1965 until 2018, he delivered annual returns of 20.6% via his Berkshire Hathaway (NYSE:BRK.B) investment.

He seeks to invest in easy to understand businesses that have a very strong market position and pricing power – the ability to raise prices over time. These businesses should also have significant unrecognised value. In short, he wants high-quality, safe stocks at attractive prices.

If you want to invest directly in his holding company by buying a single Berkshire Hathaway share, it will cost you around US $312,000 (£268,424).

Alternatively, several successful UK fund managers, such as Nick Train (Lindsell Train funds and Finsbury Growth & Income (LSE:FGT)) and Terry Smith (Fundsmith Equity), run their funds according to Warren Buffett's principles.

Fund manager Keith Ashworth-Lord has taken this one step further by obtaining an exclusive licence to use Mr Buffett's name.

Since its launch in March 2011, the Buffettology fund has delivered a cumulative 234% return.

Terry Smith's Fundsmith fund has done even better, delivering 380% since its launch in November, 2010.

Growth Investing - Jim Slater

Jim Slater (1929-2015) was a self-made financier and investor who in his book, The Zulu Principle, explored the idea of investing in small caps that are undervalued yet are growing fast, with earnings rising.

He famously wrote:

"Most leading brokers cannot spare the time and money to research smaller stocks. You are, therefore, more likely to find a bargain in this relatively under-exploited area of the stock market."

As part of his methodology, Mr Slater used the price-earnings-growth (PEG) ratio to identify companies that offered good growth and value. At its simplest, you divide the price per share by the earnings per share to find out how much an investor is paying for £1 of a company's earnings or profit. This is known as the PE ratio. Then to arrive at the PEG ratio, you divide this number by the expected growth rate: the lower the PEG, the cheaper the growth.

His son, Mark Slater, has an excellent track record of using this methodology in his Slater Growth fund, which since inception in March 2005 has delivered a cumulative return of 471%.

Value Investing - Sir John Templeton

Sir John Templeton (1912-2008) was a successful US-born investor and fund manager, who founded the Templeton Growth. He specialised in seeking out growth opportunities globally, often in out-of-favour stocks. He was not only good at identifying global trends, such as the rise of Japan in the 1960s, but was also a great stock-picker.

One of his sayings was:

"When buying stocks, search for bargains among quality stocks."

He argued that quality companies came in different forms but included those strongly entrenched as the sales leader in growing markets, technological leaders in a field dependent upon technical innovation and those with strong management teams with a proven track record.

His Templeton Growth Fund delivered a 13.8% annualised return from 1954 to 2004, versus 11.1% for the S&P 500 (a US equity index that measures the performance of the largest 500 US listed companies).

This fund is a possibility for those who wish to piggyback on his methodology but be warned that it has performed poorly over the past five years, delivering a cumulative return of 42.8% versus 72.7% for its benchmark, the MSCI All Country World Index.

Bargain stocks - Walter Schloss

Walter Schloss (1916-2012) was trained by Ben Graham, the father of value investing, and went to work for him, where he met Warren Buffett. Unlike Mr Buffett he specialised in very cheap undervalued stocks. In 1955, he started his own fund and, over the next 45 years, delivered annualised returns of 15.3% versus 10% for the S&P 500.

He liked to buy out-of-favour stocks, with little debt, that were backed by plenty of assets. He also advocated that investors diversify to avoid one investment sinking a portfolio.

He wrote in 1979:

"We want to buy cheap stocks based on a small premium over book value, usually a depressed market price, a record that goes back at least 20 years, even though the company may be somewhat different then than now, and one that doesn't have much debt."

Mr Schloss was pretty much a one-off, but Tweedy Browne in the US invests in companies trading below intrinsic value. Its Global Value fund has delivered an annualised average return of 6.46% over the past 20 years, versus 4.28% for the MSCI EAFE Index that measures the equity market performance of developed markets outside the US and Canada.

Momentum Investing - Josef Lakonishok

In 1994, Josef Lakonishok, together with two fellow academics, founded LSV Asset Management. It uses quantitative models to discover value-oriented companies. The fundamental premise on which their investment philosophy was based was that "superior long-term results can be achieved by systematically exploiting the judgmental biases and behavioural weaknesses that influence the decisions of many investors. These include: the tendency to extrapolate the past too far into the future, to wrongly equate a good company with a good investment irrespective of price, to ignore statistical evidence and to develop a 'mindset' about a company."

He looked for value stocks that are beginning to show some signs of positive momentum, in price or earnings. A Lakonishok-inspired strategy tracked by the American Association of Individual Investors returned 13.9% in the 10 years to the end of 2014, versus 5.4% for the S&P 500.

Those attracted by this approach can invest directly in LSV Asset Management's Global Value fund, although it has only delivered an annualised return of 3.67% over the past five years, compared with 6.16% for the MSCI ACWI Index that is designed to provide a broad measure of equity-market performance throughout the world.  

Six steps to piggyback investing

Whichever investing philosophy most attracts you and whichever expert you follow, it is important to follow these steps.

1. Before choosing your investor, ensure that their record is genuine and doesn't just cover a few years. Many have lucky streaks but few investors manage to outperform the market over a full economic cycle. A minimum of 10 to 12 years is really what you should look for at the present time.

2. Follow them for a decent length of time and don't switch between them unless you are a seasoned investor. Even the best investors can have a bad year or two, so you need to give your strategy time to work. Impatience damages investment performance as jumping around increases your trading fees. Ideally, give it five years and don't invest money you will need in the interim.

3. Continue to research and learn about their investing style. You want to understand what made them tick and why they adopted the strategy they did. Do not rely on secondhand summaries of their style but make the effort to read their own writings and watch their video interviews.

4. Be humble: you are not foolproof. Even the great investors made mistakes but they used them to learn and improve. You must too. When they made errors what did they learn from them? How did they think and act in times of stress? Never stop asking questions.

5. Does your expert run a fund? Why not invest in that? If you are more confident, pick a couple of stocks in their top 10 list of investments and investigate what makes them a good investment? This is higher risk but may produce better returns.

6. Alternatively, to reduce your risks, you could find a fund run by a highly regarded fund manager who shares a similar style.

Of course, investing in individual stocks, as opposed to a fund, is generally riskier but there is nothing to stop you doing both if you are confident doing so. Still, it is best to take things slowly for the first few years. Even the best investors took decades to perfect their craft.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.