scorecardresearch6 investing lessons from Philip Carret, who Warren Buffett hailed as a

6 investing lessons from Philip Carret, who Warren Buffett hailed as a mentor

Updated: 14 Sep 2023, 09:08 AM IST

Philip Carret’s investment journey can be described best as one of those that witnessed almost every high and low that the market had to offer – be it the effect of the great depression or the second world ear or endless market cycles that covered 31 bull markets, 30 bear markets and 20 recessions.

Investing principles by one of the greatest Wall Street's investors Philip Carret

Investing principles by one of the greatest Wall Street's investors Philip Carret

While the whole world listens intently to what Warren Buffett says or thinks about investing, imagine who this great investor pays attention to. Buffett, also dubbed the Oracle of Omaha, names Philip Carret as an underrated investor who has continued to be successful in the investment world for a prolonged period.

It goes without saying that Carret’s investment journey endured the test of time, weathering the challenges of the Great Depression, the Second World War, and numerous market cycles throughout a 31-bull market career, along with 30 bear markets and 20 recessions. 

Carret who later went to pip Pioneer Fund as one of the greatest in fund management attributed his stamina and patience to his successful stint in the investing world. He once said, “Traders rarely die rich; patient investors often do. I have known many investors who are a great deal smarter than me, but they haven’t had the mindset. After one unsuccessful investment, I tried to review the mental process that had led me astray – my ego.”

Carret’s investing approach is studied as commandments of investing that still continue to stand the test of time. Some of these include:

Never hold fewer than 10 different securities covering five different fields of business

It is widely believed that diversification plays a crucial role in risk reduction and the optimisation of returns. By maintaining a well-diversified portfolio comprising a minimum of 10 distinct securities across five different sectors, investors can mitigate their exposure to the performance of any single company or industry. This approach becomes especially advantageous when one company or sector underperforms, as the other constituents within the portfolio can help counterbalance the losses.

The five sectors recommended by Carret for diversification purposes are as follows:

Consumer Cyclicals: These encompass companies that manufacture goods and provide services highly influenced by economic fluctuations, such as retailers and homebuilders.

Consumer Defensives: This category includes companies producing goods and services that are relatively resilient to economic variations, such as food and beverage enterprises and utility providers.

Healthcare: This sector encompasses companies involved in offering health-related products and services.

Industrials: Within this sector, you’ll find companies engaged in the production of goods and services utilised by other industries, including machinery and transportation firms.

Technology: Companies in this sector are focused on the development and sale of technological products and services.

It’s important to note that the specific industries you select for your investment portfolio should align with your individual risk tolerance and investment objectives. Nonetheless, adhering to Carret’s counsel by diversifying your portfolio across a minimum of 10 distinct securities and spanning five distinct sectors is a prudent strategy for minimising risk and enhancing your potential for long-term success.

Once every six months, reappraise every security held

Carret emphasised the significance of periodically evaluating your investments to ensure they remain in harmony with your investment objectives and risk tolerance. By revisiting your investment holdings every six months, you can pinpoint any securities that have deviated from their expected performance or are no longer suitable for your portfolio. In such cases, you have the opportunity to divest from these underperforming assets and redirect the proceeds into more suitable investments that align with your financial objectives.

When conducting a re-evaluation of your investments, consider the following factors:

Company or security performance: Assess whether the company or security has met your performance expectations.

Market conditions: Examine whether the prevailing market conditions are conducive to the growth and stability of the company or security.

Investment goals and risk tolerance: Reassess whether your investments continue to align with your financial goals and your capacity to withstand risk.

Fees and expenses: Evaluate the reasonableness of the fees and expenses associated with the investment.

Liquidity: Determine if the investment can be easily sold if the need arises.

Should you determine that an investment no longer suits your financial objectives, you can divest from it and reinvest the proceeds into alternative assets that better suit your needs. Consistently reviewing your investments will help ensure that your portfolio consistently progresses toward achieving your financial goals.

It is important to note that the suggested six-month review period serves as a general guideline. Your individual circumstances may necessitate more or less frequent assessments. For instance, if you are saving for retirement, you may opt to review your investments more frequently to confirm they remain aligned with your retirement aspirations.

Keep at least half the total fund in income-producing securities

Philip Carret believed that it is important to have a balance of income-producing and growth-oriented securities in your portfolio. Income-producing securities, such as bonds and dividend-paying stocks, provide a steady stream of income that can help offset the volatility of growth-oriented securities.

The famous investor recommended that investors keep at least half of their total fund in income-producing securities. However, the specific allocation will depend on your individual circumstances and investment goals. For example, if you are retired or nearing retirement, you may want to have a higher allocation to income-producing securities to generate income. If you are younger and have a longer investment horizon, you may be able to afford to have a lower allocation to income-producing securities and focus more on growth-oriented securities.

Here are some of the benefits of having a balance of income-producing and growth-oriented securities in your portfolio:

  • Income-producing securities can help to provide a steady stream of income that can help offset the volatility of growth-oriented securities
  • Growth-oriented securities can help to grow your portfolio over the long term
  • A balanced portfolio can help to reduce risk and maximise returns.

It is important to note that there is no one-size-fits-all answer to the question of how much of your portfolio should be in income-producing securities. The best allocation for you will depend on your individual circumstances and investment goals. If you are not sure how to allocate your portfolio, you can consult with a financial advisor.

Here are some of the income-producing securities that you can consider for your portfolio:

Bonds: Bonds are loans that you make to a company or government. They typically pay a fixed interest rate over a set period of time.

Dividend-paying stocks: Dividend-paying stocks are shares of a company that pay out a portion of their profits to shareholders on a regular basis.

Real estate investment trusts (REITs): REITs are companies that own and operate income-producing real estate. They typically pay out a portion of their profits to shareholders as dividends.

When choosing income-producing securities for your portfolio, it is important to consider the following factors:

Creditworthiness of the issuer: The issuer should be financially sound and have a good track record of paying its debts.

Interest rate: The interest rate should be competitive and should provide a good return on your investment.

Maturity date: The maturity date should be aligned with your investment goals.

Liquidity of the security: The security should be easy to sell if you need to.

By considering these factors, you can choose income-producing securities that are right for you and your portfolio.

Consider (dividend) yield the least important factor in analysing any stock

Philip Carret firmly held the belief that dividend yield ranks as the least critical factor in stock analysis. In his view, there existed far more significant considerations, notably a company’s financial robustness, growth potential, and the competence of its management.

Several compelling reasons underscored his perspective on why dividend yield should not be the paramount factor in stock evaluation:

Misleading nature: Carret contended that dividend yield could be a deceptive metric. A high dividend yield did not invariably signify a sound investment. For instance, a company with a lofty dividend yield might be distributing a substantial portion of its profits to shareholders, potentially indicating insufficient reinvestment in its future growth.

Variable yield: He also emphasised that a stock’s dividend yield was subject to fluctuation over time. Various factors, including the company’s financial performance, broader market conditions, and investor sentiment, could influence it. Consequently, dividend yield alone could not reliably predict a stock’s future performance.

Broader considerations: Carret advocated for a holistic approach to stock analysis, placing greater importance on factors beyond dividend yield. These included the company’s financial stability, growth prospects, and the competence of its leadership. In his view, these elements held more weight in assessing whether a stock constituted a sound investment.

While acknowledging the utility of dividend yield as a tool for comparing different stocks and identifying firms likely to pay dividends in the future, Carret maintained that it should not overshadow other critical factors in investment decision-making.

Here are some of the additional factors he deemed essential when assessing the quality of a stock:

Financial strength: Assessing a company’s financial strength was imperative, as it determined its resilience during economic downturns and other challenges. This assessment could be made through an examination of the company’s balance sheet, income statement, and cash flow statement.

Growth prospects: The potential for stock price appreciation over time hinges on a company’s growth prospects. Evaluating these prospects entailed a close look at the company’s products or services, its target market, and its competitive position.

Management: The competency of a company’s leadership plays a pivotal role in its performance. Analysing management involved scrutinizing their track record, experience, and leadership style.

In conclusion, while Carret acknowledged the relevance of dividend yield, he advocated for a comprehensive approach to stock analysis, where a company’s financial health, growth outlook, and the calibre of its management held greater sway in investment decision-making.

Be quick to take losses and reluctant to take profits

Carret strongly advocated the principle of “cutting losses short and letting profits run” as a fundamental approach to successful stock market investing. This strategy entails selling a stock promptly when it begins to decline while holding onto a stock as long as it continues to appreciate in value.

Several key reasons underscored Carret’s belief in this approach:

Risk mitigation: Carret asserted that losing money in the stock market was often easier than making it, given the market’s inherent volatility and rapid price fluctuations. Delaying the sale of a declining stock could result in more significant losses than if it were sold promptly.

Capital preservation: Protecting one’s invested capital was of paramount importance to Carret. Capital represents the financial resources committed to the stock market, and excessive losses could jeopardize one’s ability to invest effectively in the future.

Emphasis on patience: Carret underscored the significance of patience in stock market investing. He viewed the stock market as a long-term endeavour, with investments having the potential to appreciate in value over time when given the necessary time to do so.

While no investment strategy can guarantee success, adhering to Carret’s advice of cutting losses short and letting profits run can help reduce risk and enhance one’s chances of achieving success in the stock market.

Here are some practical tips for implementing Carret’s approach:

Utilise stop-loss orders: Employ stop-loss orders, which automatically trigger the sale of a stock if it falls below a predetermined price. This can assist in promptly cutting losses when a stock declines.

Park your profits: Don’t hesitate to sell profitable positions when you’re satisfied with your gains. The fact that a stock has appreciated in value doesn’t guarantee it will continue to do so. Locking in profits can be a prudent move.

Exercise patience: Understand that stock market investing is typically a long-term endeavour. Avoid expecting rapid wealth accumulation and be prepared to wait for investments to mature over time.

In conclusion, Carret’s strategy of cutting losses short and allowing profits to grow serves as a valuable guideline for navigating the complexities of the stock market. It stresses on risk management and capital preservation, ultimately increasing the potential for long-term success.

Seek facts diligently, advice never

Conduct your own research and autonomously make your investment choices. He cautioned against depending on the counsel of others, as their motivations may not align with your best interests.

Carret’s commitment to this approach was grounded in several key reasons:

Comprehensive risk awareness: He stressed the significance of comprehending the inherent risks in investing. Relying on external advice could obscure a full understanding of the risks involved.

Emphasis on discipline: Carret underscored the importance of maintaining discipline in one’s investment decisions. Allowing oneself to be unduly influenced by external advice could lead to impulsive choices that may not serve one’s best interests.

Long-term perspective: Carret advocated for patience in the stock market. He viewed stock market investing as a long-term endeavour and believed that exercising patience could lead to the appreciation of investments over time.

While Carret’s guidance does not discount the value of expert advice entirely, it underscores the importance of individuals taking an active role in their investment decisions. This approach ensures a more comprehensive understanding of the risks and fosters discipline and patience, key elements for long-term success in the stock market.

There is always some extent of speculation involved in every game of investing considering how it is not possible for investors to be aware of all the nuances of the stocks they are buying or the companies they are investing in. As he shared in one of his interviews, “The line between an investor and speculator is blurry because every investment comes with some speculative risk. The road to success in speculation is the study of value. The successful speculator must purchase or hold securities that are selling for less than their real value, avoid or sell securities that are selling at more than their real value.”

Deciding your investments is not easy; it is made more difficult by the uneasiness felt when selling a stock. This is why you must take care to invest in good companies so that you decide to sell their stocks when something goes horribly wrong.


These are some of the investment tips shared by the legendary investor Warren Buffett.
First Published: 14 Sep 2023, 09:08 AM IST