Billionaire Investing Rules

During the second half of the 20th century, Larry Tisch and his brother, Bob, built a multibillion-dollar conglomerate. How did they do it?

Larry, the financial mastermind, had a knack for spotting value. In 1960, the brothers took control of Loews, at that time a major movie-theater chain. But they were less interested in the movie theaters themselves and were more enticed by the real estate on which those theaters stood.

Loews is now a $16 billion company comprising insurance, hotels and offshore oil and gas. The stock has returned more than 800 percent over the past 20 years, an annualized return of 11.8 percent. Larry's son, James Tisch, the current CEO, recently reflected on the guiding principles on which Loews was built.

"First and foremost," says Tisch, "everything we have is fully protected." What does that mean for the individual investor? For a start, avoid companies that use large amounts of debt to finance their activity. The shackles of interest and principal payments are heaviest when a company is least able to shoulder them. Companies in this situation are extremely restricted in their operating flexibility.

Tisch next argues for businesses with "long-term assets, that are going to be here for a long time and aren't dependent on management." Successful investing boils down to two things: estimating the value of the future cash flows a company will produce, and taking advantage of situations in which there is a significant discrepancy between your estimated value and the price of the company's shares. Insisting on "long-term assets" means excluding businesses whose future is difficult to predict.

Finally, be patient. "If there's nothing to do, do nothing," Tisch says. Value investors gain from being patient while waiting for a current investment to approach its fair value, and while waiting for circumstances in which superior companies become temporarily undervalued. That runs counter to our natural inclination to take action often.

These rules are simple but hard to follow. They can reward you well, though.