Stop Trading, Start Investing!

The following is adapted from my upcoming book, "Stop Trading, Start Investing" (due out in July, 2015):

With only a handful of possible exceptions, the greatest fortunes ever made in the stock market were not made by quick-turn traders. They were made by long-term investors. For every trader who manages to build a retirement nest egg from trading (good luck with that!), there are a hundred thousand stock market millionaires, and a thousand stock market billionaires. None of them made their fortunes by trading the markets. Rather, they earned their fortunes by investing in the markets.

Consider the following examples:

Until his retirement in 2003, Ralph Wagner ran the Acorn Fund which achieved an annualized return since its 1977 inception of 16.3%. Wagner’s investment philosophy is simple: find a stable, long-term trend in the economy and invest in the best companies serving that trend. His value-driven thesis-centered investing style worked very well. If you had invested just $10,000 with Wagner back in 1977, you would have had nearly $600,000 to your name by the time he retired.

One of my investment heroes is Sir John Templeton, founder of the funds family that bears his name. Templeton got his start in 1939 by putting $10,000 into some of the cheapest stocks on the New York Stock Exchange. He held everything for four years. During that time a number of the companies he bought went bankrupt. But the rest didn’t. His original stake had doubled twice. With his $40,000 portfolio, he then took a more disciplined, value-oriented approach, eventually turning his assets into $300 million by 1954, then several billion before he retired in 1992. Money Magazine called Templeton “the greatest global stock picker of the century.” Queen Elizabeth II knighted Sir John for his many philanthropic endeavors. Today, in the wake of his passing in 2008, his legacy is the charitable work of his foundation which seeks to support Templeton’s Christian commitment to world peace and spiritual learning.

Many of you would have heard of Peter Lynch, author of the best-selling book, One Up on Wall Street. Lynch began his investing career as an analyst for Fidelity Investments. In 1977 his skills as a stock picker were recognized and he was given management of a new fund called “Magellan.” By the time Lynch handed over the reins of Magellan just 13 years later, he had transformed it into the most successful mutual fund of all time. He grew assets under management to $14 billion by achieving an unheard of annual return of 29%! His secret? Lynch only invested for the long run; he paid little attention to short-term market fluctuations, or the inevitable headwinds in the companies he liked.

One of the longest and most successful careers on Wall Street belongs to Philip Fisher. He began his own investments firm, Fisher & Company, back in 1931 near the bottom of the Great Depression’s market crash. Fisher sat the helm for 68 years until his retired at age 91. Fisher’s investing methodology was simple: he liked to find innovative companies with strong growth potential that were trading at attractive prices. Once he found what he was looking for, he bought in and held for years, sometimes decades. His longest hold was a position in Motorola which he bought in 1955 which he held until his death in 2004! Fisher famously said, “I don’t want a lot of good investments; I want a few outstanding ones.” Had you been fortuitous enough to have invested $10,000 with Fisher & Co. in its inaugural year, at his retirement you would have been able to cash in an amazing $38 million!

Of course, the greatest stock market fortune of all time was built by the greatest investor of all time, Warren Buffett. Buffett just celebrated fifty years at the helm of Berkshire Hathaway, the investment company he bought back in 1965. Buffett learned his investment style from his former professor at Columbia University, the financial economist, Benjamin Graham. Graham taught an investment methodology that sought to buy companies with higher “intrinsic value” (what the company was actually worth) than its current market price. This “margin of safety,” as he called it, is what makes a company worthy of investment over the long term. Buffett took this methodology to a whole new level. In fact, Buffett was so successful at implementing Graham’s “buy quality companies cheap” strategy, if you had invested $10,000 when he first took over Berkshire Hathaway, you would be sitting on a fortune of over $50 million today!

So what is the moral of this story? STOP TRADING!

Let me be more specific. Stop trading as an end in itself. Stop jumping in and out of companies you know nothing about. Stop basing your buy and sell decisions exclusively on price action. Strop fretting over every rise and fall of your account balance. There is a better way. This book will teach you that way.

Posted to Dr. Stoxx Options Letter on May 12, 2015 — 9:05 AM
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