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How To Pick Stocks Like Masters

Views 13892022.11.11

Roy Neuberger: The Art of Investing

Key Takeaways

● Neuberger established one of the first no-load mutual funds in the United States.

● He made his name by short selling the stock of the Radio Corporation of America in 1929.

● His prescient investment advice can be a good learning resource for new investors.

Neuberg passed away at the age of 107 from 1903 to 2010.

He witnessed almost every significant market boom and bust of the last century in his 70-year investment career, and he survived two major financial crises in 1929 and 1987.

Debut in the stock market

Neuberger started his investment journey as a runner for a brokerage firm in March 1929 as the bull market was heading for its peak.

He realized something was wrong with the market after losing all of his initial returns in the year. To hedge his wealth, he sold short the Radio Corporation of America, the most popular stock of the era. In his autobiography So Far, So Good — The First 94 Years, Roy Neuberger wrote about this short sale in detail.

After careful research of the company, Neuberger found out this highly-traded stock might be overvalued. To dig into the reasons behind its bloated stock price, he consulted other experienced traders, but nobody could give him a definite answer. They could only explain that the era of radio was approaching.

But Neuberger disagreed. He argued the company's fundamentals were not solid enough to support its stock price. In his view, the radio was a mere tool with obvious shortcomings and limited growth potential compared with automobiles.

When the company's stock price hit $100, he shorted 300 shares, a total of $30 thousand. Over the following two years, the price fell to as low as $2 per share.

Ten investment tips from Roy Neuberger

Neuberger outlined ten investing principles in his autobiography based on his 70-year trading experience.

1. Know Thyself

"Success in investing is based on applying knowledge and experience. It is a good idea to specialize and invest in areas in which you already have specific knowledge. If you recognize that you've made a mistake, you should get out of that trade as quickly as possible." He also believed investing requires a high level of energy, a quick response to numbers, and, most importantly, common sense.

2. Study the great investors

Neuberger said even the most outstanding investors of the past have been through difficult times and have made mistakes in their careers. He argued that their stories can inspire new investors to figure out different ways to succeed in the market. "T Rowe Price succeeded by appreciating the importance of the growth of new industries. Ben Graham did it by understanding the basic values. Warren Buffet did it by elaborating on the lessons he learned from Ben Graham, his teacher at Columbia University. George Soros did it by relating a thoughtful philosophy to international finance. Jimmy Rogers did it by discovering the defense industry stocks and by passing along ideas and analyzing them to his boss, George Soros. Each has been highly successful in his own way," he said.

3. Beware of the sheep market

"One comments on a stock, and it moves up or down 10 percent. That could not be a real bull market or a bear market. I call it a 'sheep market.' In the sheep market, people try to guess what the crowd will do, believing they can be swept along in a favorable current. That can be dangerous. The crowd may be very late in acting. Suppose it's an institutional crowd. Sometimes they overinfluence each other and are the victims of their own habits." he said.

4. Keep a long-term perspective

Neuberger argued that investors tend to care too much about short-term earnings and ignore the importance of longer trends. Short-term benefits should not be a company's focus when investing in its operations. Earnings increases should be the fruit of long-term strategies, proper management, and good exploitation of opportunities.

5. Get in and out in time

According to Neuberger, figuring out when is the right time to get into or out of the market is vital for investment success. "What looks like the best long-term investment can be terrible if you buy at the wrong time. And sometimes, you can make money in highly speculative stocks by buying at the right moment. The very best securities analysts can do well without following market trends, but it's a lot easier to work with the trends." He took his loss at the 10% level. If the stock falls more than that, he believed it's better to close the trade.

6. Analyze the companies closely

Neuberger attached great importance to the study of a company's management, the leaders, their track records, and their goals. He also suggested checking the company's real assets and cash per share and considered the dividends it pays out.

7. Don't fall in love with a particular stock

Many people get obsessed with peculiar thinking, ideals, or even a particular stock in a world full of adventures. Neuberger warned against falling in love with a particular security as it is just a sheet of paper representing a part of ownership in a company. "it's all right to be in love with a security – until it gets overvalued. Then let somebody else fall in love," he said.

8. Diversify, but don't hedge alone

Neuberger underlined that hedging is a tricky procedure and investors should be careful while using it because they could "lose on both the long and short." He added that if some investors are determined to use this technique, they should make sure that reasonable diversification should also be applied.

9. Watch the environment

By environment, Neuberger refered to the general market trends and the world outside the market. He didn't buy the business cycle idea and instead seizing the opportunity when it arises.

10. Don't follow the rules

Neuberger encouraged investors to be flexible and make investment decisions based on economic, political, and technological changes. In most cases, he was against the tide of opinion and sticks to thinking independently.

The bottom line

Except for an investment career of unprecedented longevity, Neuberger's attitudes toward success, wealth, and new technologies also contribute to his achievements.

Investors can gain insights from studying the strategies that help this financier emerge from the 1929 and 1987 market crashes unscathed.

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