The stock market is weak and many shares have fallen. But investors can find some of their best long-term stocks during times of uncertainty.
It’s the classic contrarian approach used by billionaire investor Warren Buffett. But to make it work for me, it’s important to have a clear strategy. And that means developing a set of rules to use as a guiding light.
However, even with a plan in place and a contrarian philosophy, it’s still possible to lose money on shares. And that’s why it’s worth me remembering that all shares carry risks as well as positive potential. And I should only invest money I’m prepared to lose.
That doesn’t mean losing it is certain! I’m determined to do everything possible not to. And here are five ways I’m aiming to beat the performance of the general stock market:
1. Buy businesses, not tickers
One-time star US investment fund manager Peter Lynch wrote, “Behind every stock is a company. Find out what it’s doing”.
Lynch went on to explain the success of a company’s operations and that of its stock can remain uncorrelated, “over a few months or even year”. But in the long term, “there is 100% correlation”.
I reckon there’s opportunity in Lynch’s observations. Sentiment can cause stocks to undervalue thriving businesses. Therefore, by focusing on a business and its operations, it’s possible to find good companies. And if the stock market is valuing them cheaply, they could make enduring and lucrative long-term share investments.
2. Fish in quiet pools, not in raging torrents
This analogy means it’s best for me to look for investments in sectors that seem to be out of favour. The alternative is to search in red-hot sectors.
But the trouble with popular stocks is they tend to have higher valuations. And that’s because everyone wants them. Therefore, taking a contrarian approach could lead me to finding some enduring, undervalued long-term winners.
3. Develop rules and follow a strategy
An investment strategy is something that evolves over time for most people. And it ends up being a personal fit. It’s important I invest in a way that’s comfortable for me.
And my strategy is expressed in a number of rules to follow when choosing investments. The rules tell me where to look and what to consider. And there’s a checklist of requirements for businesses to satisfy before I’ll consider buying their shares.
4. Invest for the long term
Being a patient investor could serve me well. It takes time for operational progress to unfold in a business. And it’s unwise for me to choke off gains too early. Decent, growing businesses are not always easy to find at reasonable valuations. So, when I do find them, my plan is to hold on with the same tenacity I would if owning the entire business.
5. Diversify, but not too much
It’s easier to follow a few businesses than many. And most of the successful investors I’ve followed advocate keeping diversification under control. My plan is to do the same.
These ideas won’t guarantee my future success in the stock market. However, I’m optimistic they’ll help me succeed over time.
