How Billionaires Invest

By Richard Gibbons

When I look at Forbes' list of the world's billionaires -- a.k.a. the list of people who make more in a day than I have in my entire lifetime -- it becomes quite clear that there are two ways to make stupidly large amounts of money. Either build a company that grows to be worth billions, or become a successful investor.

Frankly, creating a billion-dollar business sounds hard. So let's ignore Bill Gates and instead focus on Nos. 2 and 3 on the list. There you find Warren Buffett and Carlos Slim.

A tale of two billionaires

Now, most people know Buffett. He's a value investor who walks right by the overhyped, exciting investments and heads straight for the boring, ugly, beaten-down stocks in the bargain bin. He buys newspapers. And paint and carpet companies. And when he's feeling particularly frisky, he'll buy an underwear manufacturer.

Yet this fellow made himself billions. Go figure.

The third person on the list, Mexico's Carlos Slim, is far less familiar. He's noteworthy not just for his $53 billion fortune but also as the person who gained the most wealth in the last year ($19 billion). In fact, Slim's net worth is still growing at a phenomenal pace: Since Forbes' list was released in February, Slim has earned an additional $4 billion and overtaken Buffett as the second-richest man in the world. To make that money, surely Slim would have to be in some really exciting businesses?

Umm, no. Slim has been in cigarettes, real estate, soda bottling, auto parts, and insurance. He's owned slow-growers such as Kraft Foods (NYSE: KFT) and Allis-Chalmers Energy (NYSE: ALY), and he loves phone companies like Telecom Italia (NYSE: TI).

How they did it

So how the heck did these guys make so much money in such boring industries? By following two simple rules:

Buffett made a fortune when he bought loads of Coca-Cola (NYSE: KO) at incredibly low prices in 1988. Although the company was struggling with its acquisition of Columbia Pictures, Buffett recognized that Coke still had a solid brand and was dirt cheap.

Slim's first huge opportunity came during Mexico's 1982 economic crisis. When international investors fled in panic, Slim noted that "the low value of many enterprises was even more irrational than the pessimism in the business community." He bought and reaped immense profits.

At this point, Bill Gates is looking kind of lonely, so let's go back to him.

Everyone knows that Gates made his billions by founding Microsoft . But if you've ever looked at his personal stock portfolio, the names would surprise you. He's owned names such as GAMCO Investors (NYSE: GBL) and PNM Resources (NYSE: PNM). The former provides investment advisory services and the latter delivers energy to the western United States. At this point, it should be obvious. Bill Gates is into boring value stocks, too.

The Foolish bottom line

Now, there's a reason that the top three billionaires on this list are value investors. It's because they know that value investing simply outperforms all other types of investing.

That's why it pays to always be on the lookout for value stocks, particularly when the market gets volatile. Buffett and Slim made some of their most successful investments by buying when everyone was panicking. You can, too.