Richer, Wiser, Happier: How the World’s Greatest Investors Win in Markets and Life

by William Green

First, warned Ruane, “Do not borrow money to buy stocks.” He recalled an early experience when, by using leverage, he “took six hundred dollars and multiplied it many times.” Then “the market cracked” and he was hit so hard that he sold out and was “back almost to square one.” As he discovered then, “You don’t act rationally when you’re investing borrowed money.” Second, “Watch out for momentum.” That’s to say, proceed with extreme caution “when you see markets going crazy,” either because the herd is panicking or charging into stocks at irrational valuations. Third, ignore market predictions: “I firmly believe that nobody knows what the market will do. . . . The important thing is to find an attractive idea and invest in a company that’s cheap.” For Ruane, the fourth principle was the most important of all: invest in a small number of stocks that you’ve researched so intensively that you have an informational advantage. “I try to learn as much as I can about seven or eight good ideas,” he said. “If you really find something very cheap, why not put fifteen percent of your money in it?” For regular investors, there are safer paths to success. “Most people would be much better off with an index fund,” said Ruane. But for investors aiming to beat the market, concentration struck him as the smart way to go: “I don’t know anybody who can really do a good job investing in a lot of stocks except Peter Lynch.”