The basis for long-term investing success is finding a method, strategy, or philosophy you can live with and then follow. If you find something that works for you and allow your money to compound over time, the results will likely be staggering. Lets look at a few easy, simple examples. First, let’s look at investing in a company and compare that with generally investing in the stock market.
Investing in a company is much easier as you do not have to follow the ups and downs of the stock market, but they are usually more volatile, so after five years, your investments are likely to be back where you started. If you had invested $1,000 into Apple (AAPL) five years ago, and it was now worth $100,000, why would you ever get out of it? The reason might have been that the business that made money had not done well, which has since changed.
Here are the 8 pillars of investing.
- The basis for long-term investing success is finding a method, strategy, or philosophy you can live with and then follow.
- If you find something that works for you and allow your money to compound over time, the results are likely to be staggering: This is true if they are compounded over a longer time. 5%-8% a year is not so staggering, but 50% compounded yearly will be spectacular.
- Invest with a margin of safety: Invest only in things or businesses that you understand, and buy them when the price is at a bargain or at least when it is on sale – when people aren’t paying much for them.
- Diversify to reduce risk and maximize returns: This is a topic of much debate. However, too much diversification reduces the return on your investment.
- Stay informed, informed, and informed: Educate yourself on everything you can about business, economics, and value investing.
- Invest for the long term and stay invested throughout market cycles. Only get in a rush to sell if there is an opportunity you believe will not last long (an event).
- Resist the urge to trade frequently, as it can be very painful [to a portfolio over time].
- Accept what is given, make it work for you, and take pride in your long-term results: Accept that the stock market is volatile and unpredictable, don’t try to predict it. If things are not working out, find something else that might work or get out of the stock market altogether.
Let’s say you found a method for investing or a strategy for investing. A strategy/method that has worked well for many others and can work for you. You then decide to follow it. You do not get out of the business, or you do not sell your stock, but you follow it. Then, you are likely to see staggering results. There is much more you should do if you want to be successful. For example, you should avoid debt, live within your means, understand the nature of compounding interest and make sure that you give yourself enough time to see the results of your efforts.
Doing this with stocks, however, is a bit more complicated since there are so many. I have noticed that many people make investment decisions based on what they’ve seen in the news or over the past few weeks and need to look at long-term trends. That is a mistake. The stock market follows specific, well-defined trends, which are very easy to recognize if you only look long-term enough. So let’s start with this common theme that one might see in the stock markets for both companies and stocks generally in general:
A trend that lasts a short time tends to continue for extended periods (i.e., short-term trends tend to stay until they’re broken, but long-term trends tend to last forever). For example, if XYZ stock has a run up of 100% over the course of a month, it will run another 100% within the next year. But what happens after that? In general, stock markets go down before they go up and so it is possible that you might have to wait several years before your investment recovers. In those periods, it may not be easy to hold on.
Together, they form a foundation to build a portfolio strategy. If properly understood and followed, they will lead to investment success. When your investments are working well, you should feel very good. And when they need to be fixed, you should examine them closely to see why this is so. You can then reassess your strategy or change it altogether, depending on the best thing to do at that point.