Give me five minutes and I’ll make you a better investor

One of the first things many investors look at when researching a potential company to invest in is its share price and whether it’s up or down over the last year.

Does this information help you make better investment decisions?

Let’s play a game, how would you feel about buying shares in a company with a share price that has gone up 60% in three months?

How about investing in a company with a share price that has gone up 200% 16 months?

Most people would not want to buy shares in these companies because the share price has gone up so high and so fast and so they feel that have already missed the boat and the share price will pull back soon enough.

What if I tell you that the first company is Xero Limited (ASX: XRO). In the period from January 2015 to March 2015 and since then, the Xero share price has gone up another 80%.

The second company is REA Group Limited (ASX: REA). In the period from December 2012 to March 2014 and since then, the REA share price has gone up another 40%, including the recent market pullback.

Just because a share price has gone up doesn’t mean it can’t keep going higher. Conversely, just because a share price has dropped doesn’t mean it can’t drop even further.

In my opinion, one of the most important things is to invest in a portfolio of high-quality businesses (often the market demands a high premium for such companies) and building your positions over time.

If your investment horizon is long enough, the daily volatility in share prices begins to take shape in an upward trajectory. Over time, the best quality businesses generate more revenues which flow through to the bottom line and are subsequently reinvested at a high rate of return to generate more revenues.

If you are looking for a high-quality business to add to your portfolio, you will want to read this report.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can find Kevin on Twitter @KevinGandiya.

The Motley Fool Australia owns shares of Xero. The Motley Fool Australia has recommended REA Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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