Value Investing: Famous Value Investors

By Amy Fontinelle

The interesting thing about the value investors who have been especially successful is that they have all achieved extraordinary returns while investing different amounts of money in different stocks at different times. While many of them worked or studied with each other at some point and their basic investment approaches are founded in the same principles, they have achieved their stellar results independently. Here are six value investors whose names you should know.

Benjamin Graham
All value investors trace their roots back to Benjamin Graham. Born in 1894, Graham is considered the father of value investing. He authored the two books that form the foundation of value investing theory: "Security Analysis"(with David Dodd) and"The Intelligent Investor." He developed the idea of buying stocks below their intrinsic value to limit downside risk and promoted the idea that stocks often trade at prices that do not reflect their intrinsic value. Graham's techniques inspired Warren Buffett and have informed Buffett's investment strategy for decades. Graham worked as an investment manager and as a lecturer at Columbia.

Warren Buffett
Buffett was born in 1930. He was Graham's student at Columbia and later his employee. Buffett thinks of buying stocks as buying companies (and is wealthy enough that he sometimes buys entire companies), and he has an indefinite time horizon for his investments. He made his first investment at age 14 and became a millionaire by around age 30. Along with Charlie Munger, he purchased a textile company called Berkshire Hathaway (NYSE:BRK.A, BRK.B) in 1965 and used the cash flows from the business to invest in companies such as Coca Cola (NYSE:KO) and American Express (NYSE:AXP) and to purchase entire companies such as GEICO. He has become one of the wealthiest men in the world through value investing. In 2010, Forbes estimated his net worth at $47 billion. (Learn more in Think Like Warren Buffett.)

Seth Klarman
Klarman is the founder of the Baupost Group, which is an investment partnership, and has a history of double-digit returns and beating the S&P 500 since he founded it in 1983. He has achieved these stellar returns even though he sometimes holds large amounts of cash. As of 2010, his net returns averaged 19% a year and he managed $22 billion. He is risk-averse and bases his value stock picks on companies' liquidation value. He is also willing to think outside the box and choose investments other than U.S. stocks that other investors might not think to consider or might be afraid of. According to his 2010 Baupost Group letter, the keys to long-term investment success are to have "truly long-term capital; a flexible approach that enables you to move opportunistically across a broad array of markets, securities, and asset classes; deep industry knowledge; strong sourcing relationships; and a solid grounding in value investing principles." He also believes in looking at what other investors are doing to consider what you can do differently to outperform them.

Walter Schloss
Early in his career, Schloss worked with Buffett at Graham's firm, Graham-Newman. In 1955, he started his own investment management firm. In 50 years as an investment manager, he averaged about 15% annual returns after fees. He uses company financial statements and the investment publication Value Line for much of his investment research. He looks for companies where management is a major stockholder, debt is low and the stock is trading at a discount to book value. Strategies he has used successfully include shorting stocks and holding large amounts of cash when he didn't see good investment opportunities. He also diversified beyond what some value investors would recommend, sometimes owning more than 100 stocks at a time. Schloss also never went to college, proving once again that you don't need a university degree to make lots of money and you don't need to major in finance to become a great investor.

Christopher H. Browne
Browne worked at Tweedy, Browne Company, an investment firm founded by his father, Forrest Tweedy, for 40 years. Tweedy, Browne's investment philosophy is based on Graham's teachings. In fact, Graham traded through the company for three decades. Buffett was also a customer: it was through Tweedy, Browne that he purchased Berkshire Hathaway. The company also had a relationship with Schloss. Initially a brokerage, Tweedy, Browne became an investment firm in 1975 and later developed a handful of value-oriented mutual funds that have outperformed the S&P 500. In 1983 the company started investing in international value stocks. The company's managing directors pride themselves on owning the same investments that they manage for their clients.

Irving Kahn
Born in 1905, Kahn is yet another Graham disciple - he even worked as his teaching assistant at Columbia. He also contributed to Security Analysis. Along with Graham and other investors, Kahn founded the New York Society of Securities Analysts in 1937. The NYSSA honored him with a lifetime achievement award in 2007.

Kahn started the New York-based private investment firm Kahn Brothers Advisors in 1978 with two of his sons. The company adheres to Graham and Dodd's margin of safety principle and invests in businesses that are priced below their true value. The managers focus on investments in seasoned businesses in depressed but well-established economic sectors. However, rather than focusing on large cap stocks like Buffett does, Kahn Brothers focuses on small and medium-sized companies and even invests in securities through the over-the-counter market. Like Tweedy, Browne, the firm's managers purchase the same investments for themselves that they purchase on behalf of their clients. Also, Kahn Brothers' analysis emphasizes balance sheet data over income statement data. They seek out securities selling at a discount to net working capital per share and adjusted per share book value and that have a low price-to-earnings ratio. (A company's efficiency, financial strength and cash-flow health show in its management of working capital, check out Working Capital Works.)

In the next section, we'll discuss options for incorporating value investing into your portfolio without doing all the usual grunt work.