Claude Rosenberg (1928 – 2008) is a name that few investors have likely ever heard. Rosenberg made his fortune as a money manager with $40 billion under management at its peak. He was pretty eccentric but delivered solid results by managing money the old fashioned way. Perhaps Rosenberg is better known for his enthusiasm for charitable work and for convincing many of his uber-rich friends to give generously to charity, if only to lower their own tax bills.
Early in his investing career, Rosenberg developed strong ideas on what to do and what not to do, and stuck with those ideas through the years, undeterred by new investing paradigms or any of the other noise that’s a constant part of the world of finance.
His investments were guided by strict adherence to the following eight principles:
1. Worry not where the stock has been, worry instead about where it’s headed
Rosenberg’s primarily focus was on a stock’s fundamentals such as its competitive positioning, products and services, reputation for quality, market share, revenue stability and growth prospects, earning, cash flow and debt levels, and how all this was factored into its current stock price, irrespective of prior history. He’d never chase after hot stocks but would only buy a stock if he could get it at the right price today based on its future earnings potential and fundamentals as a business.
2. Worry not about the market, focus instead on individual stocks
Most investors let market sentiment drive their investing behavior. Rosenberg believed that was all wrong. Much like Buffet, Rosenberg believed that bad markets can often be an investor’s best friend because they throw up opportunities to buy great stocks at bargain prices. Rosenberg wanted investors to not let market sentiment deter them from making high quality purchases.
3. Don’t let public opinion drive your investment decisions
Rosenberg, who died fairly recently in May 2008, distrusted investment advice from friends and relatives because he found that they seldom did their research thoroughly and more often went on hearsay, superficial research, emotion and general market sentiment. And even though the Internet has made information more accessible, perhaps Rosenbergis right that the investing public still does not go deep into figuring out a stock’s fundamentals before buying, or has the training to know how.
4. Leave your emotions out of your investment decisions
This is a fairly consistent theme with great investors – they keep their emotions out of it. But then again, one hears the occasional story on how a Buffet or a Soros committed errors and lost billions when their hearts came in the way of their minds. For most investors, going by gut feelings may seem right at the time but rarely works well over the long run with investing (even though it works great with life decisions). For example, when markets are down, your gut will likely tell you to stay out of the market and discourage you from buying up beaten down stocks. Chances are your fear will make you believe the stock could go much lower and have you sit it out when you really should be jumping in.
5. Embrace stocks at the bottom of a bear market, ignore them at the top of a bull market
Rosenberg believed in buying shares when everything else was gloom and doom, and liked to sell them when things looked rosy and almost too good to be true. Quite the opposite of what most investors do. It’s amazing how much money gets frozen as cash when sentiment is low – just the opposite of what should really happen.
6. Do not worry about timing the market
Even the best of investors cannot time the lowest lows or the highest highs consistently. So, Rosenberg believed in not worrying too much about market momentum on the upside or the downside, or putting too much weight on general market direction. He based his buying and selling decisions on the attractiveness of a stock’s price relative to its fundamentals.
7. Do not fall for stock market fads
Rosenberg saw a lot of fads in his lifetime – with plastics, electronics, biotech, the Internet, the housing market, etc. He was very wary of such fads and of investing in sectors that become market darlings on every investor’s wish list. He also believed that financial media liked to jump on to popular hot topics, drive up hoopla on passing trends, take valuations to levels that were completely unwarranted by fundamentals, and hurt investors over the long run. His advice – sit out these fads because you never know when something will go out of fashion, and you’ll likely only find out when it’s too late.
8. Focus on quality
A lot of investors tend to look for the next Google or Apple, in the trash cans of the investment world. Sometimes, profits can be made by buying and selling low-quality stocks but this is not a sustainable investing strategy. Investors will do much better if they focus on top-notch companies at reasonable valuations than looking for rags-to-riches performers. While it’s okay, once in awhile, to invest in something that holds rags-to-riches potential, investors must do so with only a small portion of their wealth, something they can easily afford to lose – but never bet the farm. Rosenbergpoints out that vast fortunes have been made investing in solid companies like Coca Cola and Procter & Gamble, and that’s what investors should focus on. As he liked to say, if you sleep with dogs, you’re bound to get fleas!