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Bill Rouane's 4 Investing Principles

Bill Ruane, one of the most successful stock pickers of his generation. When Warren Buffett closed his investment partnership in 1969, he recommended Ruane as a replacement for himself. Until his death in 2005, Ruane’s Sequoia Fund generated stunning returns. He almost never granted interviews, but we spoke at length about the four guiding principles he had learned in the 1950s from “a major star” named Albert Hettinger. “Those simple rules have been of enormous importance to me,” said Ruane. “They formed the basis for a large part of my philosophy ever since.… And they are the best advice I can give people.”


First, warned Ruane, “Do not borrow money to buy stocks.” He recalled an early experience when, by using leverage, he “took six hundred dollars and multiplied it many times.” Then “the market cracked” and he was hit so hard that he sold out and was “back almost to square one.” As he discovered then, “You don’t act rationally when you’re investing borrowed money.” Second, “Watch out for momentum.” That’s to say, proceed with extreme caution “when you see markets going crazy,” either because the herd is panicking or charging into stocks at irrational valuations. Third, ignore market predictions: “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.”


For Ruane, the fourth principle was the most important of all: invest in a small number of stocks that you’ve researched so intensively that you have an informational advantage. “I try to learn as much as I can about seven or eight good ideas,” he said. “If you really find something very cheap, why not put fifteen percent of your money in it?” For regular investors, there are safer paths to success. “Most people would be much better off with an index fund,” said Ruane. But for investors aiming to beat the market, concentration struck him as the smart way to go: “I don’t know anybody who can really do a good job investing in a lot of stocks except Peter Lynch.”

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