The Right Approach To Long Term Investment Success In The Stock Market

There are many ways to make money in stocks. But not every way works well over longer periods of time.There are people who never make any money from stocks and there are others who make significant amounts of money in the stock market only to lose it again.To understand how to make money from stocks and keep it the long term we need t0 study the habits of investors who have remained successful over a long term.Such an exercise shows that the odds of long-term investment success are greatly enhanced with an approach that embodies most or all of the following characteristics:

• Thinking about investing as the purchasing of companies, rather than the trading of stocks.
• Ignoring the daily noise of  the market. As Graham wrote in his classic, ‘The Intelligent Investor‘, “Basically, price fluctuations have only one significant meaning for the true investor. They provide him an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal. At other times, he will do better if he forgets about the stock market.”
• Only buying a stock when it is on sale i.e. available at a discount to its intrinsic value.
• Focussing first on avoiding losses, and only then think about potential gains. “We look for businesses that in general aren’t going to be susceptible to very much change,” says Warren Buffett “It means we miss a lot of very big winners but it also means we have very few big losers…. We’re perfectly willing to trade away a big payoff for a certain payoff.”
• Investing only when the odds are highly favorable — and then investing heavily. As Fisher argued in ‘Common Stocks and Uncommon Profits’, “Investors have been so oversold on diversification that fear of having too many eggs in one basket has caused them to put far too little into companies they thoroughly know and far too much in others about which they know nothing at all.”
• Not focussing on predicting macroeconomic factors. “I spend about 15 minutes a year on economic analysis,” said Lynch. “The way you lose money in the stock market is to start off with an economic picture. I also spend 15 minutes a year on where the stock market is going.”
• Being flexible! It makes little sense to limit investments to a particular industry or type of stock (large-cap growth, mid-cap value, etc.). Notes Legg Mason’s Bill Miller, the only manager of a diversified mutual fund to beat the S&P 500 index in each of the past 10 years, “We employ no rigid industry, sector, or position limits.”
• Shunning consensus decision-making, as investment committees are generally a route to mediocrity. Remember Buffett says, “My idea of a group decision is looking in a mirror.”
• Adopting a low frequency of transactions.This cuts costs and reduces the number of decisions to be made and so reduces the number of mistakes.So the best shares to buy are those of companies with very profitable businesses and with wide moats.