Why Do Rich Investors All Say the Same Thing?

All successful investors recommend the same few easy-to-understand actions.

For example, take Christopher Browne, author of The Little Book of Value Investing, which I read a couple days ago.

There is nothing new in Browne's book, although I do recommend that you read it. Browne recounts much of the research that's been available for free on his company's website. And he peppers the book with numerous examples from his multidecade career as a successful investor.

Browne likes to buy stocks that are:

I can't help noticing the word "cheap" appearing twice in that list.

I read another new investing book this week, The Dhandho Investor, by Mohnish Pabrai.

Pabrai has been talking about the same ideas for as long as I've known about him (about three years now). They're great ideas, and they're spelled out in the book, which I also highly recommend that you read. (Both books are enjoyable reading, as well as short and to the point.)

"Dhandho" is an Indian word meaning "endeavors that create wealth," but which connotes "a good deal." When you find a really safe, really cheap stock, you should exclaim, "Dhandho!"

Pabrai has been making himself and his clients boatloads of money for several years by using a list of nine principles he calls The Dhandho Framework. Among those principles are "Margin of safety—always" and "Invest in distressed business in distressed industries."

Now turn to Warren Buffett, praised by both Browne and Pabrai as a major influence in their careers. I don't recall the exact quote, but Buffett has said that when a great business meets a one-time huge, but solvable, problem, it creates an enormous opportunity. That's how he bought American Express, Wells Fargo, and most of the other stocks and companies that made him (at one time) the second-richest man in the world.

This kind of thinking is also what we shoot for in Extreme Value and our new advisory, The S&A Penny Letter.

We buy what's cheap. We always insist upon a margin of safety. We often focus on distressed stocks in distressed industries. We like to see hated stocks that have fallen significantly in price. We also like to see heavy insider buying/ownership.

We bought JPMorgan Chase last year when negative stories were circulating about its merger with Bank One and new CEO, Jamie Dimon. Since then, the stock is up 33% in a year. It was selling for 1.3 times book value, dirt-cheap for a major money-center bank.

We recommended Alexander & Baldwin in October 2002, when the stock was near a new bottom on news of union squabbles at West Coast ports. The company was trading at an enormous discount to the value of its 90,000 acres of Hawaiian land. The land kept your money safe until the squabbles went away. The stock has appreciated at a little less than 25% a year since then. How many stocks in your portfolio can you say that about?

We recommended Janus Capital Group in July 2004, when it was making headlines as part of the mutual-fund trading scandals and under investigation by New York Attorney General Eliot Spitzer. We knew Janus' reputation was sterling and that it had violated no laws. The stock has appreciated at 20% a year since then.

I could produce at least 35 more examples from the Extreme Value portfolio, but you get the picture. Altogether, we've recommended 47 stocks inExtreme Value. Only four have been sold at a loss. Only two of those were real mistakes, though. The others were only mistakes because we recommended selling too soon, not because we weren't right about the stock's value.

Right now, in the Extreme Value model portfolio are four blue-chip, brand-name companies trading below our maximum buy price. All four of them are names you'd instantly recognize. All four produce plenty of cash flow. All four are getting negative press. All four are trading well below what they're worth by any rational standard.

All four are cheap in relation to their earnings. Three of the four have fallen significantly in price. Insiders are buying them. Big, famous investors (like Browne, Buffett, and Pabrai) are buying them, too.

I don't know how else to say it. Buying cheap, safe stocks is how big, rich investors get big and rich. Period. That's the basis for all the investment recommendations we make in both Extreme Value and The S&A Penny Letter.

That's all it takes to get rich in stocks. The rest is just a bunch of hooey people make up to sell books and, yes, I must admit it, newsletters.

Good Investing,