4 stocks that a trio of the world’s best money managers are placing massive bets on — plus 4 investing philosophies and strategies that fuel their success

• Bill Ackman, Michael Baron, and Charlie Munger are among the most successful investors.
• In recent interviews and a book, they shared tips on how to succeed in the stock market.
• They include portfolio concentration and investing in quality companies with good management.

Investing does not have to be a dangerous endeavor. Today, you can invest in virtually risk-free Treasury bonds for reasonable returns.

However, if you want to make more substantial long-term gains, you must be willing to take on more risk. One method is to invest in the stock market.

Some of the world’s best money managers, including Charlie Munger, Bill Ackman, and Michael Baron, shared strategies and philosophies for navigating this risk and succeeding in the stock market in recent interviews and a book. Four of them are listed below.

Maintain a focused portfolio

A concentrated portfolio is one that invests in a small number of stocks rather than a larger number for the sake of diversification. While index funds that track the S&P 500 are widely regarded as good ways to gain broad market exposure, Munger, Ackman, and Baron take a different approach.

“If you want to be a successful investor over time and find a handful of great businesses, doing nothing but owning them is an amazing strategy,” Ackman said in September at CNBC’s Delivering Alpha conference. “It’s underappreciated, if you will, as a successful way to make money.”

This means that Ackman is putting 40% of his Pershing Square Holdings portfolio into just two stocks: Alphabet (GOOG) and Universal Music Group (UNGVY). According to Morningstar data, his fund has outperformed 99% of comparable funds over the last 15 years.

For Baron, who co-manages the Baron Partners Fund (BPTRX) with his father Ron Baron, this equates to putting 85% of his portfolio in just ten stocks. Tesla (TSLA) is by far the largest holding, with 41% as of September 30. According to Morningstar data, the fund has outperformed the Nasdaq over the long term and outperformed 99% of comparable funds over the last 15 years.

Munger, the Berkshire Hathaway (BRK.B) partner of fellow investing legend Warren Buffett, famously takes that to an even greater extreme.

“I think it can be a rational choice, in some situations, for a family or a foundation to remain 90 percent concentrated in one equity,” Munger wrote in his book, “Poor Charlie’s Almanack,” elaborating, “indeed, I hope the Mungers follow roughly this course.”

Berkshire Hathaway’s holdings included Apple (AAPL) at 46.5% of its portfolio as of June 30.

Purchase high-quality stocks

Investing in quality stocks is the key to success with a concentrated portfolio. A quality stock is one that consistently generates profits and returns on capital. Apple and Alphabet are considered consensus quality stocks, and Munger is well known for his love of Coca-Cola stock, which is also traditionally classified as quality.

Munger believes that focusing on consistent and large profit margins pays off in the long run.

“If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return, even if you originally buy it at a huge discount,” he added. “On the other hand, if a business earns 18 percent on capital over 20 or 30 years, even if you pay a high price, you’ll end up with a fantastic result.” So the key is to get into better businesses.”

Invest in companies with strong management teams.

One aspect of a company that contributes to its “quality” is its management team. Baron stated that he regularly checks in with the management of the companies he owns to identify potential problems and that he attempts to independently verify what they tell him.

He also stated that he tries to understand the team members and studies their track records.

“We’re betting on people,” Baron said earlier this month to Insider. “We need to know who the management team is, what motivates them, what’s their vision, where they’ve been successful in the past, and where they’ve failed in the past.”

Munger stated that he examines how management teams allocate the company’s capital to determine whether they are trustworthy.

Purchase stocks that have a competitive advantage.

Developing a competitive advantage is another way for a company to generate consistent profits over time.

Understanding a company’s competitive advantage, according to Baron and Munger, boils down to knowing its products, the market, and why other companies won’t be able to eat away at it.

Ackman mentioned some of Alphabet’s competitive advantages, such as artificial intelligence. These include data they can pull from their search engine and Gmail products, as well as their existing cloud infrastructure.

“They’ve got many, many competitive advantages, and I think in some ways, you know, in an integrated fashion, it gives them an enormous advantage,” he said. “They will be a dominant player in AI for the very, very long term I — we would expect.”