Is This Billionaire the Most Successful Individual Investor?
Outside of the superstar fund managers that everyone knows, some of the most successful traders and investors in the world are people you may never have even heard of.
These people are likely to have their own inspirational stories as well, but they choose to go under the radar and commit to their craft.
One of those investors is Herbert Wertheim. A self-made billionaire worth $2.3 billion. Not much is known about his investing, but luckily for us, Forbes recently ran an article on him and we wanted to share his remarkable story with you.
For someone that hasn’t gained too much media attention as an investor, Wertheim is surprisingly difficult to miss. At the age of 79, you’ll rarely see him without his signature red fedora hat.
Despite this flashy element to his appearance, his career has been anything but flashy. A student of the long-term buy-and-hold school of thought, his investing success could almost be said to mirror that of greats such as Warren Buffett.
Although, unlike many of these famous top investors, investing has not been his full-time career. In fact, he attributes his other business ventures to the majority of his success.
At school, Herbie did not perform particularly well, in fact at 16 he faced truancy charges in court, where he was offered the choice between state reformatory or the US Navy. He chose the navy.
This is where things began to change for him, as he became one of the top performers in the class, particularly in mechanics and organisation.
He studied physics and chemistry there and then moved into naval aviation, at this point the cold war was heating up, American industry was growing and the Dow Jones had recovered the losses from the 1929 crash. With aerospace stock performing particularly well, Herbie used his knowledge of naval aviation to purchase Lear Jet stock; a company that was well known for its role in aviation manufacturing during world war two.
Once he left the navy he sold encyclopaedias and studied engineering, before going on to work for NASA in a division that improved instrumentation for manned flights. He didn’t graduate from his engineering course but did graduate from the Southern College of Optometry after receiving a scholarship.
A Keen Inventor
After becoming an optometrist he opened up his own practice where he worked for 12 years. He was also a keen inventor and would spend his spare time working on those inventions.
At one point he landed a contract for one of his inventions for tinted lenses, however, due to contractual breaches it did not pan out. From there he decided to become more serious and created Brain Power Inc and continued with his inventions. Today the company has over 100 patents and annual revenue of $25 million.
It was with cash from Brain Power Inc, that he began to invest in the stock market.
Herbie’s background in engineering, along with his experience as an optometrist and an inventor paved the way for his style of investing.
One thing he focuses on is a company’s portfolio of patents. This has led him to invest in highly successful companies like IBM, 3M and Intel. In a similar way to legendary investors such as Warren Buffett and Carl Icahn, he says the key to his success is investing in companies with strong management.
Another major focus for Herbie is investing only in things you know. A philosophy that fund manager Peter Lynch popularised in his book ‘One Up on Wall Street’ back in 1989.
An example of this for Herbie was investing in a company called Heico which produces airplane replacement parts. At first, he said the company was a disaster but through his aviation background he was able to turn the company around and for the last 28 years they have compounded net profits at a rate of 19% per year. His investment was made at 33 cents a share, today they are worth a massive $80 a share; turning his $5 million investment into $800 million.
Other extremely successful investments included taking Microsoft at the IPO in 1986, and Apple at its IPO in 1980. The reason he invested in the information technology sector early on is that he had been building computers and knew a lot about them. His company BPI had also been using Apple and when Microsoft released the Windows operating system in 1985, a year before the IPO, he was convinced that not only would they be Apple’s only major competitor, but the overall winners.
Herbie’s goal is to buy and almost never sell. If a stock goes against him, he may purchase more of the stock as long as his research is still in favour of the company. He will then use dividends to cushion the pain of stocks that are moving down or sideways. He believes if a company has great intellectual property it will have lasting value. In other words, what Buffett calls a ‘moat’, or the ‘pricing power’ that Carl Icahn looks for.
If a stock is heading in his direction he will milk the opportunity as much as he can, using the dividends to fund his lifestyle and make new investments.
As with all investors, Herbie has suffered losses. One stock he bought which didn’t pan out as expected was Blackberry. He chose to cut the investment after he watched substantial profits disappear month-after-month. Herbie also hit a margin call in 1982 after the Federal Reserve raised interest rates from 12% to 20% which caused markets to collapse and cost him $50 million. This taught him a valuable lesson about the dangers of leverage.
Retirement and Philanthropy
Today Herbie is mostly retired, however, he still enjoys devoting time to his stock portfolio. Recent investments include BP, although oil has not been performing well he’s betting on their intellectual property for hydrogen fuel cells while taking the dividend in the meantime as he waits on the stock price to recover. He also owns 15 million shares in GE, once again based on their intellectual property.
He has also pledged to donate half of his wealth with the majority of funds going into public education, as without that, he wouldn’t be where he is today.
What Can We Learn?
Overall the lessons we can learn from this impressive investor are similar to other legendary investors we covered in our series and our course. Take a long-term approach rather than seeking out quick wins, compound your wealth and your knowledge (the latter of which you can do by investing in what you know), and be willing to take losses. More importantly, be willing to take the lessons from those losses to ensure you get better and better.