Do you know what the performance of some of the world’s greatest investors have in common? It isn’t probably what you think..
Investors like Seth Klarman – the billionaire founder of successful hedge fund Baupost Group – and Warren Buffett have a simple (but not easy) method for investing success.
It isn’t being the smartest guy in the room (though both are incredibly intelligent), it isn’t having the fastest trading capabilities or the most ivy league MBAs on staff.
It’s something that you or I can foster… Having a long-term perspective in your investments.
“The single greatest edge an investor can have is a long-term orientation”
– Seth Klarman
Why Long-Term Thinking Wins
Financial markets are very competitive. The competition is played using quarterly results – or even shorter time frames. Investors will jump from fund to fund and manager to manager if performance lags for even one or two quarters.
Because of this, the ‘smart money’ is forced to play a zero-sum game. They must compete with each other for the best performance every quarter. This shrinks their perspective from looking out years or decades to thinking quarterly.
This short-sighted vision creates opportunities for patient investors.
You don’t have to play the quarterly game. Instead you can invest in great businesses with strong competitive advantages for the long run.
“When we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever.”
– Warren Buffett
There are 3 steps to building lasting wealth in the stock market:
Step 1: Identify high quality businesses with durable competitive advantages
Step 2: Buy into these businesses at fair or better prices
Step 3: Hold for the long run
Where to Find High Quality Businesses
Not all businesses are suitable for long-term investing. Only businesses that are likely to be around for a long time are suitable for long-term investing (it isn’t always complicated).
There are a few places to quickly find high quality businesses with strong competitive advantages. The first is to copy from Warren Buffett himself.
Warren Buffett is the greatest investor alive today based on his $64.9 billion net worth. Buffett is required to show his stock holdings in something called a ‘13F Filing’ every quarter. You can see Buffett’s portfolio here.
Another excellent source to find high quality stocks is the Dividend Aristocrats Index. The Dividend Aristocrats Index is comprised of just 50 businesses in the S&P 500 that have 25+ years of consecutive dividend payments.
Think about the durability and strength of these businesses… They have been able to pay rising dividends every single year for at least 25 years. A few have even paid rising dividends for over 60 consecutive years. You can see all 50 Dividend Aristocrats here.
How to Buy at Fair or Better Prices
Identifying great businesses is only half the battle. To generate favorable returns over the long run, one must buy into great businesses when they are trading at fair or better prices.
The simple rule of thumb is; the lower the price-to-earnings ratio, the better. Valuing a business in practice is more complex than this in practice.
Investors looking to value a business should examine its historical price-to-earnings ratio, the price-to-earnings ratio of its peers, and the company’s historical price-to-earnings ratio relative to the S&P 500 as a starting point.
This should give you a feel for a ‘fair’ multiple of earnings to pay for the business. Once you’ve decided on a fair multiple, you can use Call Levels to send you a notification whenever the stock hits your appropriate price level.
Using Call Levels in this manner will save you significant time. Otherwise, one must periodically check the stock’s price (and earnings) to see if it is trading for a fair valuation multiple.
Having a long-term perspective is of critical importance to investing success – especially for individual investors. Having a longer time horizon allows one to take advantage of opportunities that short-term performance obsesses funds cannot.
Finding high quality businesses and buying them when they are trading at fair or better prices has worked tremendously well for Warren Buffett. There’s no reason others can’t emulate his success (on a smaller scale) and compound their wealth over time.
Call Levels’ unique notifications can help long-term investors save time by notifying them when a high quality business they are tracking has reached their preferred price.
If you want to improve returns on your long-term equity, forex, commodity and even bond investments, leverage the power of market monitoring and real-time alerts by downloading Call Levels: