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The 3 Secrets of Self-Made Billionaire Investors

By Dan Ferris, editor, Extreme Value
Monday, February 6, 2006

Warren Buffett was born in 1930 and became a child of the Great Depression. Today he's worth in excess of $40 billion.
 
George Soros was born the same year, and became a child of the Great Depression, the Holocaust and WWII. According to Forbes.com, he's worth $7.2 billion.
 
Carl Icahn was born in 1936. He was once so broke he had to sell his car to feed himself. Forbes.com says he's worth $8.5 billion today.
 
All started with nothing. All wound up billionaires. All did it by investing.
 
At first glance, they don't seem to have much in common... Buffett buys stocks and whole companies and says his favorite holding period investments is "forever." Soros became a billionaire by making huge leveraged trades in stocks and currencies. Icahn buys controlling stakes in public companies and badgers management to sell assets, buy back shares and do anything to realize hidden value.
 
But they do have some traits in common, a few core investing ideas that helped make them billionaires. Like every great secret of life, this one is hiding in plain sight. These three self-made billionaire investors...
 
1. Don't diversify
 
2. Avoid risk
 
3. Don't care what anyone else thinks
 
#1: DON'T DIVERSIFY. CONCENTRATE.
 
Consider what is likely your greatest source of wealth generation: your career. You probably haven't diversified at all in your career. Even if you tried many different careers, you were never doing several of them at once. And, even if you do more than one job, it's highly likely you spend the great majority of your time at just one of them and that just one provides the great majority of your income.
 
Why should investing be any different?
 
For many years, Buffett had most of Berkshire Hathaway's money in just four stocks: American Express, Coca-Cola, Wells Fargo and Gillette. Gillette has since been acquired by Procter & Gamble, and it looks like he might be selling Wells Fargo. He still owns the other two. In fact, he's the biggest shareholder of both, holding 12% of American Express and 8% of Coke. He's got $17 billion in those two stocks.
 
#2: AVOID RISK
 
When Carl Icahn bought Tappan shares, he was paying around $7.50 each. But he knew by looking at the balance sheet that the company was clearly worth $20 if it were broken up. That's a 62% discount to fair value, a very safe bet.
 
After Tappan, Icahn targeted a real estate investment trust called Baird and Warner. At the time he found it, the stock was trading for $7.89. Its book value was $14. That's a 44% discount to book value, and a generous margin of safety.
 
Soros manages risk differently than Icahn and Buffett. He says the first thing he's looking to do is survive, and he's known to beat a hasty retreat when he's wrong. He keeps loss potential in mind before trading. When he shorted $10 billion of British pounds in 1992, he first calculated that his worst-case loss scenario was about 4%.
 
#3: THINK FOR THEMSELVES
 
Wall Street wouldn't buy shares of The Washington Post when Buffett started buying it in February 1973. That's true, even though most Wall Street analysts acknowledged that this was a $400 million company selling for $80 million. They were too scared because the overall market had been falling for some time.
 
Soros talks to lots of people to get a feel for where a market is going. But he never talks about what he's buying or selling. He just does it.
 
Carl Icahn doesn't need Wall Street, because he has his own research team. Icahn's people comb through thousands of listed companies to find the ones that are right for Icahn's corporate raider style. Icahn has to have his own research team. If he bought research from Wall Street, the whole world would figure out what he was doing, and it would become difficult to buy shares cheaply.
 
Think for yourself, avoid risk, and don't attempt to diversify into a bunch of investments you don't understand.
 
If you really want to get rich in stocks, those three rules are your foundation.
 
Good Investing,
 
Dan Ferris
 
Editor's note: If you'd like more insight and actionable advice from Dan Ferris, consider a free subscription to DailyWealth. Sign up for DailyWealth here and receive a report on the top ways to protect your money, your family, your health, and your privacy. This report will show you the best "common sense" solutions to help you protect yourself from some of the worst elements in America today. Click here to learn more.




Market Notes


NEW HIGHS OF NOTE LAST WEEK

Gold, silver, platinum, palladium, copper, aluminum, lead, and zinc
Suncor Energy (SU)… Athabasca oil sands
Oceaneering International (OII)… underwater oil services
Newmont Mining (NEM)… world’s largest gold producer
Syngenta (SYT)… agricultural chemicals and seeds
Washington Group Int. (WGII)… heavy construction
Gilead Sciences (GILD)… biopharmaceuticals
ProLogis (PLD)… industrial REIT
Sasol (SSL)… petrochemicals
Canadian Pacific (CP)… railroads
Goldman Sachs (GS)… financial services
Russell 2000 Index… small cap stocks


NEW LOWS OF NOTE LAST WEEK

Overstock.com (OSTK)… Internet retail
Google (GOOG)… don’t say we didn’t warn you
Amazon.com (AMZN)… Internet retail
XM Satellite Radio (XMSR)… satellite radio
General Electric (GE)… world’s second largest company
Toll Brothers (TOL)… high-end home builder

A couple of weeks ago, we mentioned that Jeff Clark, one of California's top traders, was about to make a play on one of the world’s most popular Internet companies. Jeff predicted that in a short amount of time, you could make a bundle by trading options on it. The company is Amazon.com.

Not surprisingly, as of today -- 21 days later -- Jeff's options recommendation on Amazon.com is up 135%. Jeff is clearly on top of his game. And Amazon is just the most recent example of that.


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