How billionaires invest

Motley Fool (via MSNBC.com) had an article that spoke directly to my investing strategy. It talked about the top three richest people in the world. Number 2 and number 3 on the list are Warren Buffett and Carlos Slim. Two guys that built up $50 billion fortunes investing with nothing very exciting- Coca Cola, Altria, Saks 5th Avenue.

Buffett is generally regarded as one of the greatest investors of all time, but Carlos Slim just passed him on the billionaire list! His net worth gained $19 billion last year. "Cigarettes, real estate, soda bottling, auto parts, and insurance" - not exactly flashy businesses.

These guys are doing two things: 1. They are identifying wonderful businesses, and 2. They're not overpaying for them. They are buying great stocks when no one else is interested - Slim bought businesses during Mexico's 1982 economic crisis. When everyone else was panicking, he was buying.

Look at this chart of Volcom (VLCM), the clothing distributor. Almost one year ago, I got in at $33. Then look at what happened in late July 2006 - one of their main customers, Pacific Sunwear (PSUN), had a bad second quarter, and Volcom took it on the chin. Hard - it dropped down to $18, losing almost half its value. I reviewed the numbers, and it just looked like typical Wall Street overreaction - one of Volcom's customers was having a rough go of it, but it didn't look like a permanent issue. So I bought in at $20, and that lot has more than doubled.

Note this - at the time I had about $15,000 in cash in an IRA, and I actually considered putting $10,000 into Volcom. This would have been a huge risk - it would have been a seriously oversized position in my portfolio. Look what would have happened had I done it! Oh well, I still made very decent money off the stock, and I still hold it today. Knowing that I could have made over $10,000 in about 8 months time at least gave me confidence in my investing thought process.

The moral of the story is my favorite quote from Warren Buffett - "Profit from folly rather than participate in it." Buy on the dips - when others are panicking, get in.