On a recent business trip, one of the greatest living investors told me something that has the power to make you an awful lot of money.
It was late last month… I was in New York for the Value Investing Congress – a two-day conference featuring presentations by some of the greatest investors of our time.
One of those investors is a fellow named Joel Greenblatt. Greenblatt is an investment legend, who made his clients 40% a year for 20 years. At that rate, you’re almost doubling your money every two years. It’s better than Warren Buffett.
Greenblatt is also a well-known author of some of the best investment books of our time (even though they all have hokey titles). They include You Can Be a Stock Market Genius, The Little Book That Beats The Market (one of my top five must-read investment books of all time), and his new release, The Big Secret for the Small Investor.[ad#Google Adsense 336×280-IA]On the second day of the conference, Greenblatt held a special breakfast for a small group of investors and analysts.
At breakfast, Greenblatt answered questions and told us about some of the research reported in his new book. One story caught my attention: He said the best-performing mutual fund of the last decade made about 18% a year.
All you had to do was leave your money alone, and you could have made 18% a year for 10 years. That kind of compounding could turn a $1,000 investment into more than $5,200 in a decade.
But most investors in the fund didn’t make that much. They didn’t make anything at all. In fact, they lost 11% a year.
Why? Because the average fund shareholder bought at the top of the market and sold their fund shares at the bottom.
They pulled money out after the fund performed poorly and only put it back in after the fund performed well. Instead of allowing the fund’s managers to grow their investment at 18% a year, investors panicked and sold at the bottom… and bought back in at the top.
The moral of Greenblatt’s tale was simple: Most investors are terrible at making buy and sell decisions. They let their emotions dictate what they’re doing.
So… how do we avoid that? How do we make sure you don’t wind up like the great majority of investors, who buy in a euphoric rush at the top and sell in despair at the bottom?
This information is worth literally thousands, hundreds of thousands, or even millions of dollars to investors.
But it’s simple enough…
For my money, the solution is to buy the highest-quality businesses you can find at great prices. I’m talking about the names you’ve heard from me before: stocks like cigarette giant Altria, semiconductor giant Intel, and software giant Microsoft.
When you buy these stocks and skip out on the risky junk most investors buy, you’re just doing what the father of value investing Ben Graham said: Never put your money into a low-grade enterprise. When conditions get tough, those “low-grade enterprises” will roll over like dying bugs. And they destroy your wealth in the process.
High-quality businesses, on the other hand, have the wherewithal to use tough times to their advantage…
They steal market share from their competitors. They buy back their stock when it’s cheap, increasing the value for remaining shareholders. They continue increasing their dividends year after year, meaning you’re collecting more income regardless of what happens to the share price. And their share prices often suffer less than their lower-quality counterparts.
This is what gives you the fortitude to ride out the occasional panic…
If you let the market’s ups and downs scare you into selling, or entice you into buying, you’re lost. If you’re able to ignore them and continue holding the safe, cheap stocks you’ve bought, you’ve got a great chance of winning… You’ve also got a great chance of making an awful lot of money.
— Dan Ferris
“If you can’t hold on to a stock for more than 10 months, you’re never going to make any money,” Dan writes. “Some stocks, bought at the right price, should be held for decades.” Learn more about these stocks here: An Immense Investing Advantage Anyone Can Achieve.[ad#jack p.s.]
Source: Daily Wealth