Hundreds of books have been written about successful investing in the stock market. Thousands of articles have been written about the greatest investors and how they manage to outperform Mr. Market. Yet, interestingly, a small percentage of investors manage to have long-term success in the stock market and even smaller percentage manage to outperform the respective indices.

What Gives?
The problem many investors have is that they don't know the secret to successful investing. Ironically, the secret is no secret at all. In fact, the secret has been dispensed hundreds of times over and over by folks like Warren Buffett, Seth Klarman, Bruce Berkowitz. In just about every other profession, people guard their recipes for success in order to remain on top. In investing, unlike most professions, folks have been told over and over the ultimate secret, but few fail to really apply it. There's even concrete proof that it works: Buffett has applied this secret in running Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) and the results speak for themselves. Buffett originally bought Berkshire around $9 a share in the 1960s. Since then, there have been no stock splits and the shares fetch over $100,000.

The Secret Revealed
If you want to succeed in investing, commit yourself to understand and applying the following principle:




The key determinant in making money in the stock market is to buy equities when everyone hates stocks and sell them when the world is again in love with them. Do this over and over again.

This is as simple as it gets and you don't need an MBA to understand how to apply this. What you do need is an unemotional attachment to stocks along with an ability to sit still and do nothing when the time warrants inactivity. And therein lies the problem for the vast majority of investors. Acting on emotion, instead of rational behavior, many were dumping stocks late last year and early this year out of fear. Today, many of those same folks are buying again, willing to pay more because higher prices somehow get interpreted as being less risky.

Many will read this article, agree with it but still fail to execute on it despite the overwhelming proof to the contrary. For those willing to give it a shot, avoid businesses currently enjoying a lot of popularity as odds are their security prices will be above intrinsic value. Instead, focus on quality companies that, for some reason or another ,are currently out of favor, but possess solid fundamentals that will ultimately prove otherwise. (For more, see Removing The Barriers To Successful Investing.)

For instance, TravelCenters of America (NYSE:TA) once traded for over $40 during the height of the market in 2007. Sure, business is tough but the share price of $5 is below the net cash per share and the $20 of stated book value. Brookfield Properties (NYSE:BPO) owns and manages commercial real estate buildings in the U.S. and Canada. Everyone is sour on real estate, especially the commercial side, for very good reasons that are affecting Brookfield.

But the company owns some of the most iconic buildings in the world and its major tenants include businesses like Goldman Sachs (NYSE:GS), Bank of America (NYSE:BAC) and Target (NYSE:TGT), some of best tenants you could ask for today. In addition, the security yields 5% at the recent price of $11.25. Sure, business may be tough right now, but when you own quality assets and manage your business conservatively, you prosper tremendously when the tide turns.

The Bottom Line
Master the concept of buying when others are selling, and sell when everyone is begging to buy, and let the results speak for themselves. (For further reading, check out Understanding Investor Behavior.)

Related Articles
  1. Investing

    Build a Retirement Portfolio for a Different World

    When it comes to retirement rules of thumb, the financial industry is experiencing new guidelines and the new rules for navigating retirement.
  2. Stock Analysis

    Net Neutrality: Pros and Cons

    The fight over net neutrality has become an amazing spectacle. But at its core, it's yet another skirmish in cable television's war to remain relevant.
  3. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  5. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  7. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  8. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  9. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  10. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
RELATED TERMS
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hunting Elephants

    The practice of targeting large companies or customers.
  3. Warren Buffett

    Known as "the Oracle of Omaha", Buffett is Chairman of Berkshire ...
  4. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  5. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  6. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
RELATED FAQS
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!