In the February issue of Money Observer, we ran through the investment philosophies of four of the greatest heavyweights - Warren Buffett, Sir John Templeton, Jim Slater and Peter Lynch - while with the help of Stockopedia, a data website for self-directed investors, we identify a selection of UK-listed shares likely to attract each guru today.
We outlined Warren Buffett's stock picks last week. Below, we detail the investment approaches of the other three gurus.
SIR JOHN TEMPLETON
Sir John Templeton made his fortune going against the crowd. His biggest contrarian bet was made at the start of World War II. He bought every US-listed stock that was trading below $1.
Of the 104 companies purchased, only four turned out to be worthless, and he landed large profits on the others.
Templeton entered the fund industry in 1954, establishing the Templeton Growth fund. With dividends reinvested, a $10,000 stake in the Templeton Growth fund (share class A) at its inception would have grown to $2 million by 1992.
He made his money identifying bargains - value opportunities. But he did not simply snap up everything he could get his hands on when shopping in the discount aisle.
Instead he targeted companies with quality characteristics that for one reason or another happened to be out of favour.
Templeton used traditional valuation measures, such as price-to-earnings and price-to-book. Both measures were used by Stockopedia to find shares that would be on Templeton's radar today.
Shares that scored cheap on both measures versus the market were put forward for consideration.
Stockopedia then applied various quality filters to identify which of the cheap shares had good operating margins, low debt and above-average return on assets.
When both value and quality screens were applied, housebuilders Bovis Homes and Barratt Developments scored highly, as did Dart Group, the owner of low-cost airline Jet2.
Slater pioneered the PEG ratio, a measure widely used today to find cheap growth shares that may soon benefit from a re-rating.
PEG is the price-to-earnings growth rate - the forecast price-to-earnings ratio divided by the estimated earnings-per-share (future growth rate) figure.
According to Slater a PEG of less than one usually indicates an attractive stock. He favoured small shares over large, coining the expression 'elephants don't gallop' to convey the idea that nimble smaller companies have greater growth potential than blue chips.
|Liontrust Asset Management|
|MD Medical Investments|
Ben Hobson of Stockopedia comments: 'Slater's approach is a classic 'growth at a reasonable price' strategy that has a habit of picking up some of the most exciting growth stocks in the market.
'Typically we're talking about companies where earnings are growing and they're showing signs of having defendable market positions, with high percentage returns on capital.
'A classic Slater stock will already be rising in price. But crucially, his use of the PEG is a nod to the fact that he wanted fast growth but he wasn't prepared to overpay for it.'
Shares that scored highly on the Slater-inspired screen include Alternative Investment Market-listed Swallowfield, which makes beauty products. Others that make the grade include Liontrust Asset Management and business energy consultancy Utilitywise.
Peter Lynch's investment philosophy is simple but effective. 'Invest in what you know', but only in shares that offer 'growth at a reasonable price'.
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In essence, Lynch's style of investing is a mixture of both growth and value. He ran the giant Fidelity Magellan fund from 1977 to 1990, averaging gains of 29 per cent a year before retiring.
Lynch was wary of high levels of debt and like Slater preferred smaller companies, particularly those ignored by analysts.
Stockopedia used Lynch's share screen to find shares with strong earnings growth that are not trading at excessive valuations.
Stockbroker Numis scored highly, as did housebuilder Galliford Try. Car dealership chain Lookers also featured in the Lynch screen.
FUNDS THAT FOLLOW THE GURUS' APPROACHES
Certain funds aim to replicate the success of each guru. Some are even designed on their investment approaches and philosophies.
Templeton and Slater's investment principles live on, first in the form of the Templeton Growth fund, which since 2008 has been managed by Dylan Ball. The manager scours the market for cheap shares suffering from a problem he thinks will eventually be resolved.
Slater's investment style is replicated by his son, Mark Slater, manager of MFM Slater Growth and MFM Slater Income. Slater uses the PEG ratio to determine what he would have to pay for growth, placing a big emphasis on cash flow.
Lynch's Fidelity Magellan fund still operates in the US, but its doors are closed as far as UK investors are concerned. While not directly aiming to replicate Lynch, the Scottish Mortgage investment trust managed by James Anderson describes its investment process as 'growth at an unreasonable [low] price'.
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