Warren Buffett, one the world’s best investors, has an easy strategy that could make you rich. “I will tell you how to become rich. Close the doors. Be fearful when other are greedy. Be greedy when others are fearful.” Seems straightforward but the first question that arises is anything but simple: What should I buy?
Buffett studies companies over many years and buys them at their absolute cheapest price. He says, “I never attempt to make money on the stock market. I buy on the assumption that they could close the market the next day and not reopen it for five years.” He trusts his research and forgets about the price of the stock for five years.
Buying and holding companies is a great investment strategy for two reasons:
1. You can take advantage of the long term growth trends of a company, and
2. You’ll most likely receive dividends
One small technology stock that is trading cheap (partly due to a forecasted fall in earnings for FY14) but pays a huge fully franked dividend is DWS (ASX: DWS). Since it started reporting on the ASX in 2006, the company has maintained both an average return on capital and return on equity over 30%. It has no debt and since that time has maintained a payout ratio above 75%.
Another stock that returns strongly to shareholders is Cash Converters (ASX: CCV). Cash Converters is trading near its 52-week low yet has excellent business fundamentals and growth prospects ahead of it.
Two of my favourite stocks for long-term growth are Newsat (ASX: NWT) and Yellow Brick Road (ASX: YBR). Newsat recently completed construction on its Jabiru-2 satellite which is being prepared for a 2014 launch. Newsat’s Jabiru satellite program, if successful, will bring long-term benefits to shareholders in the form of increased earnings from huge government and private sector contracts.
“Someone is sitting in the shade today because someone planted a tree a long time ago”, is another famous saying from Warren Buffett. Investing in good companies today at the cheapest prices is the best way to secure your long term wealth. There are plenty of small ASX-listed companies that have potential to grow into something much larger in coming years but require investors to take a risk with their hard-earned cash.
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Motley Fool contributor Owen Raszkiewicz owns shares in Yellow Brick Road and Cash Converters.