Strangely enough, most investors commit a very basic mistake when they make investments. They choose quantity over quality. Psychologically, people find it very appealing to own 10,000 shares of a $1 stock versus 100 shares of a $100 stock. All the while, investors fail to forget that the size of pizza hasn't changed - it's merely 100 slices or 10,000 slices. The painful reality is that by choosing quantity over quality, the lack of quality increases the risk assumed, leading investors to sell at the first sign of trouble.

Investopedia Broker Guides: Enhance your trading with the tools from today's top online brokers.

Keep It Simple
Warren Buffett, perhaps the world's most successful investor, has a unique ability to make very sophisticated investments that have created great value for his holding company Berkshire Hathaway (NYSE:BRK.A, BRK.B). Yet as Buffett will tell you, the most successful investments that created the greatest value for Berkshire were those where Buffett chose quality over quantity. Buffett made a huge investment in Coca-Cola (NYSE:KO) in the 1980s. The cost of that investment was roughly $1.3 billion. Today, that stake is worth around $14 billion. What that gain does not reflect are the dividends that Berkshire has received each year from its ownership in Coke. Berkshire owns about 9% of Coke's shares.

In 2011, Coke paid out $4.3 billion in dividends, $360 million of which went to Berkshire. Berkshire's biggest stock investments have been heavy on quality, as Buffett deeply values intangibles like brands, market leadership and durable businesses.

SEE: Think Like Warren Buffett

Boring Is Quality
At the end of the day, stock prices anchor on earnings growth. The highest quality companies are those with consistent records of profitability. Exciting industries can be profitable, but they invite lots of competition, which ultimately serves to erode profitability. Boring businesses don't invite competition and as such, can generally be counted on for generating consistent profits at an acceptable rate of growth. WD-40 (Nasdaq:WDFC) is a great example. The company makes a boring product that has been in use for decades.

However, the profits for WD-40 are anything but boring. Investors can count on around a 2.5% dividend yield each year. Same idea with The Hershey Company (NYSE:HSY). Candy doesn't change much and there is no fear of technology risk in chocolate. And people will always eat a little (maybe a lot) of candy. Therefore, it's no surprise that HSY has a return on equity (ROE) that would excite anyone: an ROE in excess of 70%. In today's zero percent interest rate environment, the 2.3% dividend is oh so sweet.

The Bottom Line
Investing benefits those who are patient and harms those who seek excitement. The passage of time allows for compounding to go to work, which is the greatest value creating force in investing. Investing in quality should be a starting point for all investors.

At the time of writing, Sham Gad did not own shares in any of the companies mentioned in this article.

Related Articles
  1. Stock Analysis

    Will WYNN Continue to Rally?

    Wynn Resorts has experienced a rally recently. Will it remain a good bet?
  2. Stock Analysis

    Don't Be Fooled by the Market's Recent Rally

    The bulls won for a bit in early October, but will bears have the last laugh?
  3. Stock Analysis

    Will Twitter's Stock Find its Wings Soon?

    Twitter is an enigma to many investors, but its story is pretty straightforward.
  4. Investing

    Warren Buffett and the Media Industry

    While most people believe traditional media is dead, Warren Buffett sees an opportunity.
  5. Stock Analysis

    8 Solid Utility Stocks for a Bear Market

    If you're seeking modest appreciation, generous dividend payments and resiliency, consider these eight utility stocks.
  6. Stock Analysis

    Why Phillips 66 (PSX) is a Solid Long-Term Bet

    Here's why Phillips 66 will likely remain one of the world’s largest and most profitable companies for a long time to come.
  7. Stock Analysis

    This is What Bill Gates's Portfolio Looks Like

    Find out about the stocks Bill Gates has in his portfolio. Learn about the close personal and business relationship Gates has with Warren Buffett.
  8. Stock Analysis

    3 Resilient Oil Stocks for a Down Market

    Stuck on oil? Take a look at these six stocks—three that present risk vs. three that offer some resiliency.
  9. Economics

    Keep an Eye on These Emerging Economies

    Emerging markets have been hammered lately, but these three countries (and their large and young populations) are worth monitoring.
  10. Stock Analysis

    Is Pepsi (PEP) Still a Safe Bet?

    PepsiCo has long been known as one of the most resilient stocks throughout the broader market. Is this still the case today?
  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

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!