How Carl Icahn, Ray Dalio and Seth Klarman Beat The Market

How Carl Icahn, Ray Dalio and Seth Klarman Beat The Market

One of the great things about investing is there is no right or wrong way to make money, just ask Ray Dalio, founder of the world’s largest hedge fund, Bridgewater.

Just because one investor has made money using a particular strategy does not mean it will work for someone else. Simultaneously, just because an investor has lost money using a specific strategy does not mean every other investor will lose money following this path.

The way to achieve a successful outcome as an investor is to find a strategy that works for you. After all, you are the one that’s going to benefit in the end.

See also: Stock Investing: 5 Rules For Better Returns

No one else cares how you make money. No one cares if you are a value investor or like speculating with penny stocks. If it works, it works.

With that in mind, here are five different strategies five investors have used to build tremendous fortunes. They show that whatever method one follows, it’s always possible to make money.

Carl Icahn

Today, Carl Icahn is best known for his activist investing, but this isn’t where he started.

The young investor entered Wall Street in the early 1960s. After working as a stockbroker, he moved firms in 1963 and became an options manager. He took over the options department at Gruntal & Co in 1964.

Four years later, he borrowed money to set up on his own.

By focusing on options trading and risk arbitrage, the firm did incredibly well. Icahn knew the market, and he was aware a few large firms dominated options trading.

So, to stand out from the crowd, he published a newsletter, the “Midweek Option Report,” which served as a rudimentary over-the-counter market for options.

Commenting on this decision later in life, the investors said:

“So my idea was to come up with the ‘Midweek Option Report’ and in that scrupulously tell people what these things were trading for and what they should be getting, and I built a good business.”

Estimates vary, but by focusing on doing what it did best, the firm was raking in an income of $1 million to $2 million a year by the late 1960s.

This formed the foundations of Ichan’s career in finance.

Ray Dalio

Ray Dalio founded what is today the world’s largest hedge fund, Bridgewater.

The investor started his business when he was trying to solve a simple problem. McDonald’s needed someway of hedging the cost of chicken meat to eliminate the pricing risk for McNuggets. Dalio came up with a way of matching chicken and corn purchase contracts to reduce pricing risk.

The young investor built his business from there.

Bridgewater was founded on Dalio’s desire to produce a product for a client that was not available elsewhere. Since then, Bridgewater has built on this principle. Its leading Pure Alpha and All-Weather portfolios are designed to produce steady returns with reduced risk. Their vast size helps these funds meet their objectives. They can borrow huge amounts at low rates to invest in low-risk securities. This has produced higher returns with reduced risks.

This approach has worked for Bridgewater, but other firms have struggled to replicate its success. This is a perfect example of why there’s no one-size-fits-all approach to investing.

Bill Gross

Bill Gross founded the asset management group PIMCO in 1971. The firm started with just $12 million of assets. By 2014, when Gross left, assets under management were almost $2 trillion. This made PIMCO one of the largest active fixed income fund management firms in the world.

Gross excelled at trading bonds. He had a reputation as an astute gambler (so too did Icahn) and took this into the financial markets. By all accounts, Gross selected his trades carefully and acted swiftly and with conviction when he believed in an opportunity.

He also believed that the secret to beating the market was not to try and predict the future but to look to the past. Gross once said:

“The book that rests on my library coffee table is not Peter Lynch’s Beating the Street or even my own, but several books by historian Paul Johnson on the makings of the 19th and 20th centuries. There is no better teacher than history in determining the future… there are answers worth billions of dollars in a $30 history book.”

Seth Klarman

Seth Klarman is considered to be one of the best value investors of all time. His hedge fund, the Boston-based Baupost, is one of the world’s most successful and has only reported a handful of down years.

Baupost’s goal is to generate absolute positive returns year after year. To meet this goal, Klarman has focused on deeply undervalued securities, where there’s a clear path to profit.

Unlike Gross, Klarman trades stocks, bonds, debt, and real estate, Baupost has also invested in private businesses. And unlike Dalio, reports suggest Klarman has never used large amounts of debt.

Due to the way Baupost is set up, it can invest wherever Klarman and his team see value. That allows the firm to invest in assets other investors might be unwilling or unable to buy. For example, Baupost has earned substantial profits by investing in Enron’s defaulted debt and the debt of Lehman Brothers.

Bernard Arnault

Over the past four decades, Bernard Arnault built LVMH from a near-bankrupt French textile company to a global group with nearly €50 billion in annual sales. Its portfolio of 70 brands includes Louis Vuitton, Dior, Givenchy, Veuve Clicquot and Dom Pérignon.

Arnault might not be an investor in the traditional sense. He does not buy and sell stocks, bonds and options. However, he does buy businesses, and in some respects, that is very similar.

Arnault acquired a near-bankrupt textile company, Boussa, in 1984 for a symbolic value of one franc. The company owned a business he wanted, Christian Dior. He shut the rest of the business down, keeping this one firm.

From there, the group has grown and developed into the most prominent luxury goods business in the world. Its success can be traced back to two factors.

First of all, the organisation was one of the first western luxury brands to expand into China in the early 1990s. At its first store in Beijing in 1992, there was no hot water. By being the first, LVMH rode China’s growth spurt as it transitioned into a free market economy.

Second, Arnault and his team have focused on what they know, luxury products and services. Starting with Christian Dior, LVMH has rolled up luxury brand after luxury brand, with each acquisition providing more firepower for the next deal. The conglomerate has not wasted money chasing businesses outside of its circle of competence.

It’s all too common for conglomerates to spend money on diversification initiatives, which often only results in losses for the company and its investors. Under Arnault’s stewardship, LVMH has avoided making the same mistake.

The bottom line

These investors used different methods to get to the top, but once they knew what they were good at, they stuck at it, focusing on becoming better and refining their art.

There’s no one secret strategy or formula that holds the secret to investment success. However, by focusing on what one knows best, we can improve our chances.

One thought on “How Carl Icahn, Ray Dalio and Seth Klarman Beat The Market

  1. Glad you put Arnaud in this category – it is not very often that the asset allocation skills of company Ceo’s are recognised along with other investors in the asset management field

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