The Buy and Hold Philosophy
Want to make a small fortune in the stock market? There's no secret stock picking shortcut. We're in this for years.
What is Buy and Hold Investing?
That's good news, though—it's much easier to pick great stocks if you have a long term plan. After all, any company that wants to stay in business needs a good plan. It must invest in new products and improve its processes. It must retain great employees and recruit new workers. It must continue to grow, to bring in revenue year after year—not just reliable earnings but free cash.
Over time, these companies make themselves known.
How can you take advantage of this? Take a breath. Be patient. Pace yourself. While day traders obsess over the second-by-second movements of shares of companies you've never heard of, while commentators on television, radio, and the Internet obsess over the meaning of a gain one day and a drop the next, you can smile and sleep soundly. You have a secret weapon. You plan to buy and hold your share of great stocks for years.
Buy and hold investing is finding great stocks, buying them at good prices, and holding on to them forever, if possible. It's that easy to explain. It's not easy in practice, until you achieve a patience around your investing.
Think ahead three years. Which companies will be around? Which products will sell? How about five years? Ten? What do people always buy, in good times and in bad?
Avoid Short-Term Thinking in Your Investments
Markets fluctuate. Who can predict them? Trying to time the best time to buy and the specific moment to sell will drive you mad. Avoid that!
Plan in years, not days. Look for companies that are great today and will continue to be great. There are no guarantees—who knows what the future holds?—but invest in companies you understand. Invest in companies with honest reporting and proven records of success. Invest when you believe your dollars buy real value, when the share price is a fair price—when you've found the best shares to buy for long-term investment.
In return, you'll own companies dedicated to building real wealth.
Other people track the agony and joy of daily dips and gains, but this will free you to pay attention to the only numbers that matter: how are the businesses doing? How much money did they make? How much does each share represent? Are their markets growing?
Ask yourself these questions every few months. An hour of review here and there helps keep your plans on track. Keep the long view in mind and let the days and minutes worry about their own troubles. Read any list of common investing mistakes and you'll see "impatience".
The Power of Long-Term Investing
Over those years, something amazing happens. That little piece of a great company you own will pay you back many times over. Your initial research and the minimal ongoing maintenance will build real wealth.
You'll have done it by finding great companies, buying their shares when they're on sale, and letting good businesses do what they do best: earning money through hard work, fair play, and honest free market capitalism. There's no shortcut. You'll have to learn a few things. You'll have to roll up your sleeves and do some research.
The result is more than wealth. You've owned businesses. You've understood them. You've learned something and you've earned every penny of return. You haven't agonized over the daily fluctuations of the market. You're not riding the roller coaster of horse-race stock reporting. You sleep soundly at night because you know good businesses thrive.
The Buy Philosophy versus the Trade Philosophy
The market has only two broad self-directed strategies. One always looks for an edge, a quick hit, a piece of knowledge that no one else has yet. Time is not on your side. You must get in and get out to take advantage of that tiny piece of information before it expires.
The other philosophy acknowledges that it's too difficult and too risky to attempt to squeeze every last possible penny of profit out of every trade. Good businesses make good money, and if you buy their shares at fair prices, time is on your side.
Maybe you have the advantage to find these tiny, ephemeral opportunities for arbitrage. Maybe you have the stomach and the reflexes to click "Buy" at just the right moment and "Sell" a few seconds later. Maybe you can sleep soundly at night, never wondering if your automated trading program has a bug that could cost you real money.
Alternately, you could buy great stocks and hold shares until you've reached your long term goals. It takes less work than you think. Successful investment is within your reach, a few minutes at a time, a few days a month. You have everything you need to begin, right now. This is the moment you'll look back on in five, ten, or twenty years: the moment you took control of your investment destiny.