Following this one simple formula is the key to successful stock market investing

If you’re a new reader, or even if you’ve been following us for years, it’s worth reiterating a few things about The Motley Fool’s investing style and philosophy.

We’ve been around since 1993. Our purpose is to help the world invest, better.

We are long-term, business-focused investors.

We measure our returns over years, decades… and not by the day to day movements of the share market.

We are lifelong investors… and not people who flit in and flit out of the stock market based on the latest fad, hot tip, or market correction.

Speaking of stock market corrections, we look at them  as opportunities to buy stocks on the cheap, not a time to panic and sell out.

On average, stock market corrections come along around once every 12 months. Prepare now, and be prepared.

Stock markets are fickle. Most days the movements in share prices bear no relation to any change in value of the underlying company.

As an investor, by far the best use of your time is to focus on buying high quality companies at fair prices.

After all, if this one simple formula is good enough for Warren Buffett, it should definitely be good enough for you

Defining “high quality” is subjective, but here are a few things we look for…

— Founder-lead companies who have significant skin in the game.

— Companies with sustainable competitive advantages.

— Companies with recurring revenue streams.

— Companies with long growth runways ahead.

Find them, buy them at a decent price, add to your investment over time, and sit back and let the miracle of compounding returns work for you over the years ahead.

For me, a classic example of a company that ticks all those boxes is Google’s owner Alphabet. From its IPO back in August 2004, the Alphabet share price has soared from $85 to almost $1000.

Similar companies are Facebook. Amazon. Netflix. Apple. Microsoft.

It’s no coincidence these are amongst the largest companies in the world. And that they’ve been almost single handedly responsible for much of the rise in US markets so far in 2017.

The Nasdaq‘s 16.5% gain so far in 2017 comes in stark contrast to the S&P/ASX 200 Index‘s flat performance this year.

For holders in the popular big four banks, it has been worse than flat.

The Australia and New Zealand Banking Group (ASX: ANZ) share price has fallen 10% so far this year, closely followed by the Westpac Banking Corp (ASX: WBC) share price, down 9% year to date.

And the pain might not end there, especially if the banks are forced to cut their dividends, something that looks increasingly likely as house prices cool, the economy struggles, bad debts rise, and the banks are hit with the great big new bank tax.

Sounds pretty bleak.

And it looks to me like the banks are companies with limited upside potential but with increasing downside risk — just about as bad a combination as you can imagine from an investment.

Still, this shouldn’t come as anything new for regular Motley Fool readers. We’ve long been warning of this very outcome.

For a while there, while the so-called Trump Trade was running hot, the banks were on fire. But eventually, always, share prices follow earnings, and profit and dividend growth for all the banks has ground to a virtual halt.

Three of the bigger ASX 200 winners so far in 2017 have been CSL Limited (ASX: CSL)Transurban Group (ASX: TCL) and Sydney Airport Limited (ASX: SYD).

The CSL share price has jumped almost 30% higher so far this year, the Transurban share price is up 22% and the Sydney Airport share price has soared 25% higher in 2017.

All three are quality companies. They have strong competitive advantages, recurring revenue, and long growth runways ahead.

The flipside is they aren’t exactly cheap, trading on premium valuations. Just as those US giants are too.

But I’d rather pay up for quality, knowing these compounding machines will grow their earnings, and their dividends, for years to come.

It sure beats yesterday’s heroes — here’s looking at you, big four banks, Telstra Corporation Ltd (ASX: TLS), Wesfarmers Ltd (ASX: WES) and Woolworths Limited (ASX: WOW).


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Of the companies mentioned above, Bruce Jackson has an interest in Apple, Amazon, Facebook, Alphabet, Transurban and Telstra.

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