Navigating the stock market can feel like trying to find your way through a complex maze. It's easy to get lost amidst the twists and turns of market trends, financial jargon, and endless investment options.
However, the insights of investment legends like Warren Buffett and Peter Lynch can illuminate the path, making the journey much less daunting.
These financial experts advocate for simple yet effective strategies that any investor can embrace to enhance their investment outcomes.
Think long term
Buffett and Lynch's wealth has been built on the principle of holding their investments over extended periods.
Warren Buffett famously said his favourite holding period is forever. Peter Lynch also noted the real key to making money in stocks is not to get scared out of them.
They recommend against the temptation of constant buying and selling in reaction to the market's immediate fluctuations. If you've chosen a solid company at a fair price, allow your investment the time it needs to mature. While the market is inherently volatile, fundamentally strong companies tend to appreciate in value over the long haul.
Just consider the following two charts to see the result of long-term investing. Betashares Nasdaq 100 ETF (ASX: NDQ) shares have more than quadrupled since the ETF's listing in May 2015. This is approximately an 18% growth every year on average.
The Vanguard Australian Shares Index ETF (ASX: VAS) share price rose from $70 to $95.82 over the past 10 years, implying a compound annual growth rate (CAGR) of about 3%. But this isn't too bad considering its generous dividend payment of $3.74 over the last 12 months, yielding 3.9% at the current share price. Adding the capital growth and dividend yields, its total annual return is close to 7%.
Invest in what you know
Focus on businesses or sectors within your area of understanding. You don't have to be an authority, but a solid understanding of how a company operates and its keys to success is vital.
Consider the products you enjoy or the services you find indispensable. If you have faith in these, they might be viable investment opportunities.
Your next big idea may come from where you work. You may be a plumber and like particular piping products from certain brands. Or you may be a medical professional and prefer to use products or systems from one company.
This strategy minimises risk by keeping you within your comfort zone.
Seek quality at a fair value
It's a common error to hunt for cheap stocks thinking they are bargains. Buffett and Lynch encourage a focus on the intrinsic quality of a company and its potential for long-term growth.
Aim to discover outstanding companies at reasonable prices, rather than just any company at a discount. This approach entails a bit of research to ascertain the real value of a company and patience to invest at an opportune, fair cost.
Washington H Soul Pattinson & Company Ltd (ASX: SOL) may be in that sweet spot today after a 10% drop in the share price over the past three months, as my colleague Tristian highlighted. The company is a consistent dividend payer, offering a fully franked dividend yield of 2.8%.
Foolish takeaway
Investing wisely doesn't have to be overly complex. These strategies might seem simple, but they're powerful tools for creating a successful investment portfolio.
