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.
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.)