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The best investing formula

The world’s best investors know what it is, but sadly it seems many retail investors keeping seeking out schemes that will get them rich quick. Unfortunately for them, there’s no such thing.

The formula is so simple and logical that most people ask, “So that’s it?”

Unfortunately it’s not sexy, doesn’t involve trading and excludes fancy products such as CFDs, options, warrants and foreign exchange. It also requires most investors to go against their natural instincts, and it involves plenty of patience.

What is amazing is that the formula has been revealed many times, by many of the world’s most well-known investors, but still, very few investors are inclined to follow it.

So here it is. Create a watchlist of the best and highest quality companies. Buy them when Mr Market offers you a cheap price. And here’s the hardest part. Hold for many years, and let the compounding earnings machines do their work.

Pretty un-sexy huh?

But it is virtually guaranteed to work, because most of the crowd are off trying to find new schemes and formulas to get rich quick. To beat the average returns experienced by most investors, you need to be somewhat of a contrarian and do what the rest of the market is not doing. Despite me revealing the ‘best formula’ here, many investors will scoff and try something else. That’s great for the rest of us, as it means the market will occasionally offer us those quality stocks at cheap prices. Following the best formula will also mean investors don’t eat into their gains with excessive trading fees.

And here are some  examples.

Coca-Cola Amatil (ASX: CCL) has one of the strongest brands in Australia, yet investors are more concerned what will happen over the next 6-12 months, after the company announced that the 2014 financial year earnings will likely be lower than the previous year’s.

Cochlear (ASX: COH) shares are down in the dumps, over concerns that the company is losing market share, new competitors are rising and its products perhaps aren’t as good as they used to be.

Woolworths (ASX: WOW) looks expensive at the moment, but should Mr Market offer us a cheap price, it’s a good stock to have on your watchlist. Another one to consider is CSL (ASX: CSL).

All companies are highly likely to be generating materially more in profits, earnings  and dividends in five to ten years, with the share price likely to follow. And all are likely to be compounding machines over the long term.

Warren Buffett has suggested that investors imagine that they are only allowed to make 20 trades over their whole lifetime. Consider how that would affect what stocks you buy. I imagine speculative mineral explorers or small biotech companies wouldn’t be at the top of the list.

Foolish takeaway

One of the hardest things to do in investing is to do nothing. But that is virtually what Warren Buffett does day in, day out. Patience is perhaps the greatest virtue an investor can have – and following the best investing formula of course.

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Motley Fool writer/analyst Mike King owns shares in CSL, Cochlear, Woolworths and Coca-Cola Amatil. You can follow Mike on Twitter @TMFKinga

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