According to Wikipedia, it was in 1676 that the great Sir Isaac Newton – the scientist who discovered the laws of gravity amongst a host of other credits – penned the following statement:
‘If I have seen further it is by standing on the shoulder of giants’
This great quote can be applicable not just for scientists but also in plenty of other walks of life including investing…
Sad but true
Not all investors are created equally. It can take time to come to this realisation, particularly for gung-ho, new investors out to make a quick buck. However for those investors who have experienced time in the market they will know that performance can ebb and flow and that only a few investors manage to truly outperform the market over the long-term.
Follow the best
The challenge of producing top quartile returns is why smart investors try to learn from great investors such as Warren Buffett or Kerr Neilsen, the founder of Platinum Asset Management Limited (ASX: PTM).These investors have reached legendary status thanks to their stock picking skills and also their billionaire rankings.
Although lesser known in Australia, another well regarded billionaire investor is American John Hussman. Luckily for investors he writes a weekly comment which is nearly always informative which allows investors ‘to stand on his shoulders’. The other week Hussman penned an article title: The line between rational speculation and market collapse.
In short, Hussman outlined why he believes the US stock market is grossly overvalued – in fact he thinks it is nearly double the historical norm! In his words, “current equity valuations provide no margin of safety for long-term investors, one might as well be investing on a dare.”
Hussman certainly isn’t the only famous billionaire investor who is concerned about equity valuations or that the market might be nearing a top or that a nasty correction could occur at some stage in the next few years.
How to protect your portfolio
The views of “giants” can well be worth heeding and the great thing about being an individual investor is the flexibility this provides. This flexibility allows you to buy stocks that could weather a market storm successfully and actually grow stronger, such as Wesfarmers Ltd (ASX: WES) which is all cashed-up or Telstra Corporation Ltd (ASX: TLS) which has an above-average defensive business.
It also allows you to position your portfolio with managers that are equally concerned that there could be some speed bumps ahead. One example is WAM Capital Limited (ASX: WAM), a listed investment company that is currently holding around 45% of its portfolio in cash.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned.