The World's Greatest Investors

Could it be a sign of the top, wonders Warren Buffett, when "a guy with a sandwich board who announces his hedge fund in the morning will get money that afternoon"? "It's baffling," he says. "I don't know the answer." No stranger to worry, Westwood Holding's Susan Byrne notes ominously that just because "we are in a virtuous cycle" of low interest rates and rising markets, it "doesn't mean we have to stay there forever." But this market ace thinks stocks will hold steady as long as the money is still moving freely around the world — essentially, meaning as long as China keeps lapping up our debt.

Speaking of which, Oakmark International's David Herro, our overseas expert, wouldn't touch most Chinese stocks with chopsticks. "The valuations are a stretch," he says of their lofty prices. But lofty prices are like catnip to growth managers — Ron Baron of Baron Funds is so tickled with the current market dynamics that he has opened up two previously closed funds so that he has more millions to spend. Which is all to say that in our third annual installment of The World's Greatest Investors, you'll hear very different reports on how some of the greatest investment minds plan to make a splash in this record-breaking market.

That enviable handicap notwithstanding, Buffett's record is irrefutable. Shares of Berkshire Hathaway are up 18% over the past year, and since 1965 they've returned a mind-bending 21.4% a year. A $10,000 investment in Berkshire 42 years ago would be worth $34,449,000 today; the same $10,000 invested in the Standard & Poor's 500 would be worth $638,000 — mind-bending, indeed.

Christopher Davis, vice chairman of Davis Selected Advisers, which has $2 billion worth of Berkshire stock in its portfolios, still sees room for gains. He thinks the company's A shares, which recently changed hands at $109,000, are worth as much as $150,000. That said, no one expects a lunge in that direction anytime soon. Last year, an eerily quiet one for hurricanes, Berkshire's mammoth insurance earnings exploded, and the stock reacted in kind. A repeat performance is unlikely this year given that earnings will be lower. "There is no clear catalyst for the stock except for the intrinsic value of its businesses," says Tilson Capital's Whitney Tilson.

"Years ago I had too many ideas and too little cash," laments Buffett, 76. "Now I have too much money and few ideas." Which is not to say he doesn't have any of the latter. He recently took a stake in health insurer WellPoint and added to his positions in Johnson & Johnson and Sanofi-Aventis. And he put more than $4 billion to work in railroads: Burlington Northern Santa Fe, Norfolk Southern and Union Pacific.

Investors who don't want to pay $109,000 for A shares or even $3,600 for the B shares can still benefit from Buffett's advice: Put your money in an index fund if you're what he calls "a know-nothing investor." Otherwise, look for easy-to-understand companies with strong balance sheets that make something like Snickers bars, Buffett says; even if prices rise, people will still buy them. And always pay attention to a stock's price. "What else is there but value investing, really?" Buffett asks rhetorically. "Tipster investing? Dream investing? I never understood the alternative."

Buffett's Picks

Even more impressive is that Rogers has done so with very low volatility — a feat that earned him barbs from shareholders during the bubble years, when his fund badly trailed the market. But when the S&P plunged 47% in the 2000 to 2002 bear market, Equity Income investors lost just 6%. The secret of his success: He refuses to overpay. Instead of chasing hot stocks, he prefers to buy former market darlings that have lost luster. "He manages risk better than even I do," declares crosstown rival Bill Miller, who heads up Baltimore's Legg Mason Capital Management.

One Rogers bet is very close to home: T. Rowe is the largest independent holder of Dow Jones, with 15% of the stock. (SmartMoney is owned by Dow Jones and Hearst Corporation.) In May, Rupert Murdoch's News Corp. made a $5 billion offer for Dow Jones, which if accepted would put Rogers's investment solidly in the black. The Bancroft family, which owns a controlling interest, is mulling its options. "Given the challenges of the print world," says Rogers, "we think the company will be better off in a different configuration." Dow Jones declined to comment.

In general, however, Rogers is sanguine about the prospect for stocks. "I have a tough time believing the market is undervalued at 16 times earnings," he says, "but stocks aren't overpriced either." Investors should temper their expectations and buy old reliables like 3M, General Electric and Pfizer. "But don't get emotional if prices get whipped around by market gyrations," he says, adding, "We'll see more of it."

Rogers's Picks