How does Bill Ruane – the only investor that Warren Buffett has ever recommended – actually invest?
When Warren Buffett closed his partnership in 1969, he gave his partners two choices.
They could either stay in Berkshire Hathaway, shares that his partnership had purchased, or withdraw cash from the partnership.
For those who chose cash, he recommended that they invest with Sequoia Fund, which Warren Buffett’s former classmate Bill Ruane managed.
Both Sequoia and Bill Ruane were relatively unknown, despite the fact that the fund performed phenomenally.
The fund aimed to beat the S&P index by 4%, and it did much better than that until Bill Ruane’s death in 2005.
The fund invested according to the value investment principles, which are very similar to the approach in my e-book, which you can download here.
In addition to that, Bill Ruane has shared four principles.
The author William Green describes them in the introduction to his recent book, Richer, Wiser, Happier.
What are they?
1. Don’t Borrow Money to Invest
Early in his career, Bill Ruane used leverage to multiply an investment. But when the market turned and crashed, he was hit very hard and had to sell out, and he was almost back to square one.
From that experience, he discovered a painful psychological lesson about investing.
“You don’t act rationally when you’re investing borrowed money.”
Most people think that borrowing money means taking out a loan, but investing on margin will have the same effect.
Most investment accounts let you trade derivatives like options for more than you can cover.
It’s a very stressful situation to discover that you don’t have cash to cover your obligations.
2. Don’t Follow Momentum
Bill Ruane says to be really careful when you see the market going crazy, because people are either in panic or acting on greed and trading certain stocks at unreasonable valuations.
This is his version of the famous Warren Buffett quote, “Be fearful when others are greedy and greedy when others are fearful.”
3. Ignore Market Predictions
A lot of people ask me questions like:
“What do you think will happen in the stock market now? Is it going to turn on Monday?”
Or, “Are we heading into a recession?”
Honestly, I have no clue. Neither does anyone else.
In reality, you need to invest with blinders on.
You need to invest like a horse that focuses on the road in front of it, and you have to avoid getting spooked by passing traffic.
Bill Ruane says, “I firmly believe that nobody knows what the market will do… The important thing is to find an attractive idea and invest in a company that’s cheap.”
Some investors have been able to short and gamble with great success by guessing when the market will turn. The famous investor Bill Ackman shorted the market shortly before the big dip in 2020, and soon after, he plunged back into stocks, betting that it would revert.
He was right, and it was impressive, but in the end predicting the market is based on guesswork.
Others have lost large sums on reading tea leaves.
The most important thing is to focus on finding quality businesses and take them through the check list.
4. Research Well and Focus
Bill Ruane said to invest in a small number of companies that you have researched and analyzed well, so you have informational advantages.
“I try to learn as much as I can about 7-8 good ideas,” he said. And then he plunges in when the price is right.
“If you really find something very cheap, why not put fifteen percent of your money in it?” he said.
However, this advice only applies to those who do the groundwork, get their butt in the chair, and analyze a company.
For the average private investor, index funds may be the best idea. “Most people will be better off with index funds,” Bill Ruane said.
But for those who want to do a little extra to beat the market, it’s a good practice to be thorough and concentrated.
“I don’t know anybody who can really do a good job investing in a lot of stocks except Peter Lynch,” Bill Ruane said.
Bill Ruane was not afraid to put 35% of the fund’s money in a single company like Berkshire Hathaway.
Learn and Be Curious
The writer William Green, who interviewed Bill Ruane in 2001, made his own conclusion based on his conversation with Bill Ruane.
He writes that good investors are intellectual mavericks who are not afraid of defying conventional wisdom.
They think rationally, rigorously, and objectively.
They gather knowledge and always work on improving their way of thinking.
You should do the same.
Read about how others invest. Examine not only the companies, but how the world works.
You can examine my way of investing by reading my e-book, Free Yourself, which you can download right here.