Great fortunes have always been built not by diversification but by concentration. Warren Buffett's 50-plus years of market-beating performance with Berkshire Hathaway (NYSE: BRK-A) would never have happened if he had owned hundreds of stocks. (No one can pick that many winners.) And Jeff Bezos and Bill Gates aren't the world's two wealthiest men because they chose to diversify so broadly beyond Amazon (Nasdaq: AMZN) and Microsoft (Nasdaq: MSFT). If you need to goose your returns in the months and years ahead, your best strategy is to invest in stocks that give you an edge. What kinds are those? In my experience, it boils down to three types. The first is value stocks, Buffett's specialty. He buys well-managed companies with good cash flow, excellent prospects, reasonable valuations and a sustainable competitive advantage - like trademarks, patents and brand names - and then holds them not just for years but for decades. This is a proven formula to generate above-average long-term returns. But it requires something that many investors don't have - patience. As my colleague Nicholas Vardy pointed out, while Buffett has slaughtered the S&P 500 since he took the helm of Berkshire back in 1965, he has actually underperformed the market over the last one, five, 10 and 15 years. Sometimes the long term is very long indeed. Another proven recipe for success is to focus on momentum stocks. I refer to these as "growth stocks on steroids." This is the small subset of companies that lead the market in innovation, sales and earnings growth, and positive surprises. (Apple and Amazon are good examples.) Their share prices generally lead the market higher. The third proven strategy is to buy the same stocks that corporate insiders are buying. Think about it. Officers and directors have access to all sorts of material, nonpublic information about the future prospects of their business. They know about new products and services in development. They know the direction of sales since the last quarterly report. They know whether the company has gained or lost any major customers. They know whether any litigation against the company is about to be resolved. In short, they have an unfair advantage. They know all sorts of things that those on the outside looking in couldn't possibly know. That's why the Securities and Exchange Commission requires corporate insiders to file a Form 4 detailing how many shares they bought, on what date and at what price any time they buy or sell their own company's shares. And - surprise, surprise - studies regularly show that insiders substantially outperform the market with their own investments. So riding their coattails is another worthwhile strategy. Of course, anybody can plunk for a few shares of stock. The key is knowing how much to invest and when to get the heck out. Good investing, Alex P.S. Whether you're a seasoned investor or you're just getting started, you're in luck. I recently teamed up with groundbreaking journalist Bill O'Reilly for The Great American Wealth Project. It's your chance to learn about my No. 1 recommended stock right now, along with my Gone Fishin' Portfolio and many more stock picks. Just click here to watch our special presentation. | 
No comments:
Post a Comment