At any given moment in time, some investments are making money and others are losing money. Too many investors buy in a bull market, only to see their investments decline as the bears take over. Successful investors are either very good at market timing, or dedicated to long term value investing based on intrinsic investment value. What is the most profitable way to invest your money?
How to Pick Winners
There are investments that we wish we had made. Microsoft today is a huge and stable company with a nice dividend. Anyone who bought it when the company went public thirty years ago saw their initial investment grow roughly a thousand fold. Finding the next Microsoft could be a profitable way to invest your money. But, how can you do that?
Several years ago we wrote about how to pick a winner.
The good news is, there is no secret to finding and selecting winning stocks; the bad news is that you need to invest a little effort. Whether you locate a prospect through observation, watching the news, or using a stock screener, you’ve only taken the first step. After this you need to do some research: fundamental analysis of the company, technical analysis of its earnings, and even candlestick chart analysis of its stock.
Picking winning investments does not happen by chance. If you want to find the most profitable way to invest your money, you need to actively search for investment opportunities, routinely dedicate time to the project, and pay attention to your investments once they have been added to your portfolio.
When to Buy and When to Sell
When the stock market is going up, everyone wants to buy and share in the profits. And, when the market is going down, everyone wants to get out and avoid more losses. Successful long term investors don’t do it this way. They only invest in stocks when they understand the business plan and how that business plan will generate profits into the distant future.
When a falling market drives all stocks down, they buy stocks that are now under priced. When a rising market drives stocks up beyond their fundamental value, they limit their investments or even sell and take profits.
Margin of Safety
Successful investors keep track of the intrinsic value and margin of safety of their investments.
Successful long term investors look for stocks that are likely to provide strong cash flow, return on investment, and a degree of security over the years. The security in owning a good stock comes from its margin of safety.
Cash in the bank, limited debt, and unencumbered assets like property and factories are all part of the margin of safety of a stock. When Steve Jobs came back to Apple he built up a huge cash reserve so that he would never again have to go begging to Bill Gates at Microsoft for a loan. Apple has great products and an excellent business plan. And, they have an absolutely huge margin of safety with a quarter of a billion dollars in the bank.