This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The market outlook appears gloomy as inflation persists and a recession starts to feel seemingly inevitable. But investors should remember that the stock market is forward-looking, so even if the current macroeconomic situation looks bleak, stocks aren't necessarily going to continue bleeding.

In fact, the U.S. Investor Sentiment bull-bear spread is nearly neutral at around -2%. Anything above 0% indicates bullish sentiment while anything negative is bearish.    

US Investor Sentiment, % Bull-Bear Spread data by YCharts

As you can see from the chart above, the market sentiment has plunged as low as -40% as recently as September.

While the chart above suggests a capitulation, there's another telling indicator I've been watching closely: margin debt.

I believe the drop-off in leverage could suggest investors are nearing a bottom in the bear market.

What is margin debt?

Buying stocks with margin is essentially just investing with borrowed money. As greed increases in a bull market, investors start to use more and more margin until eventually the market crashes and brokerages begin asking investors to cover their debts.

This is known as a margin call, and when it happens on a large scale it typically signals the end of a bull market.

Each month the Financial Industry Regulatory Authority (FINRA) releases the total amount of margin used by investors. Tracking this data can give you an indication of where investors are in the market cycle (i.e., if margin skyrockets the market is euphoric, and if it crashes the market is fearful).

A key chart to watch

I'm particularly interested in the change in margin debt compared to the S&P 500. Historically, as margin rises faster than the market, investors can expect a crash in the relatively near future. Conversely, if it begins falling faster than the market, it could be a sign of capitulation.

FINRA Margin Debt data by YCharts

As you can see in the chart above, the margin debt levels have fallen sharply. Most notably, leverage has crashed harder than the overall market.

Let me be clear: This doesn't mean this bear market has bottomed. There are plenty of examples throughout the market's history where stocks have continued to decline despite a steeper decline in margin.

But recent history indicates this is a good sign for a market recovery, and investors should keep a watchful eye on the October margin numbers, which FINRA will release the third week of November.

This doesn't change anything for long-term investors

Tracking and analyzing the macro situation is a prudent exercise for investors, but it shouldn't change the way you invest. Even the smartest economists are more wrong than right in their predictions.

In trying to time the bottom you run the risk of having your money sit on the sidelines uninvested. The age-old market slogan "time in the market trumps timing the market" rings true today more than ever. Long-term investors are best off continuing to buy great companies on a regular basis than trying to predict exactly when the market will start its recovery.

That being said, a little macroeconomic analysis still a worthwhile endeavor so long as you don't base your investing strategy solely upon your conclusions. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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Bear markets can often feel like doomsday events for investors, but there's good that comes out of these healthy downturns. Bear markets separate the wheat from the chaff.

In other words, they make apparent the companies that are worthy of investor dollars, as well as those that probably should have never gone public in the first place.

There's one very distinguishable trait that nearly all bear market winners have in common: Healthy cash levels on their balance sheets.

Having a lot of cash allows strong companies to take advantage of cheap valuations in the form of acquisitions.

While cash-poor companies struggle to keep their boats afloat, those with strong balance sheets can bolster their businesses by buying out their competitors or acquiring entire new product lines.

How to identify a cash-rich balance sheet

If diving deep into financial statements isn't your thing, then you're in luck, because identifying a strong cash position is very easy.

Simply add the cash and cash equivalents and short-term investments/securities lines on the balance sheet, and you'll arrive at the company's total cash.

Comparing this number to the current liabilities (expenses the company will pay in the next 12 months) gives you a good idea of how cash-rich the business is.

Take Shopify (NYSE: SHOP), for example. The company has nearly $7 billion in cash and only $700 million in current liabilities. Not only does that tell us the company is more than capable of self-funding its operations, it also has plenty of cash to deploy in this bear market.

Winners from past bear markets

Some of the most prolific and profitable companies today were built on tremendous acquisitions made when the market was selling off.

Had these companies not had adequate cash reserves during these periods, they would likely not be nearly as prominent as they are today.

Let's take a look at some examples:

Data source: Public company filings and box office data. Table by author. * Does not account for revenue from Disney Plus subscribers.

In the wake of the Great Financial Crisis, Disney made one of the most important acquisitions in film history, buying up a relatively obscure comic book company called Marvel. As we all know now, the Marvel Cinematic Universe is one of the world's most successful franchises, bringing in a whopping $2.8 billion in annual revenue for Disney.

That number is pretty astounding, considering the company only paid $4 billion to acquire Marvel. And the real annual revenue is likely much higher, since it's difficult to estimate how much of Disney's streaming revenue is due to its Marvel titles.

If the Marvel acquisition looks impressive, then the YouTube and Instagram buyouts are downright silly. Alphabet paid just $1.65 billion for YouTube in the years following the dot-com bubble, and today it accounts for $28 billion in revenue for the Google parent company.

Meta (at the time Facebook) might have made the greatest acquisition of all time when it bought Instagram for a ridiculously cheap price of $1 billion in 2012. Today, Instagram accounts for roughly 44% of Meta's total revenue. To call this acquisition a home run would be the understatement of the century.

All three companies owe a meaningful amount of their success to the high-quality acquisitions made in past down markets.

Cash-rich companies are uniquely positioned to prosper in recoveries

The examples above highlight just how important it is to have cash in bear markets. An abundance of capital not only protects the business from bankruptcy, it gives the company the ability to buy up cheap assets to strengthen its competitive advantages.

Very few acquisitions will be as dramatically important as the examples above, but the discounts created by bear markets can turn average buyouts into meaningful sources of revenue and income in the future.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Mark Blank has positions in Shopify and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., Shopify, and Walt Disney. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $1,140 calls on Shopify, long January 2024 $145 calls on Walt Disney, short January 2023 $1,160 calls on Shopify, and short January 2024 $155 calls on Walt Disney. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Meta Platforms, Inc., and Walt Disney. 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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In November 2021, Bitcoin (CRYPTO: BTC) looked unstoppable as its price approached $70,000 per coin. Since then, the cryptocurrency has lost nearly 70% of its value and now trades for around $19,000.

Was this just a big financial experiment gone bust, or should investors continue to look at Bitcoin as a possible vehicle for building a diversified investment portfolio?

It's certainly possible that the king of cryptos has seen its best days, but there's also plenty to be optimistic about. When you consider Bitcoin's history of sell-offs and recoveries and an important upcoming event, this crypto looks quite attractive at current prices.

Bitcoin has a history of crashes and recoveries

If you've followed the Bitcoin story for more than a couple of years, you know that huge drawdowns are a common occurrence. In fact, there have been three crashes in the past decade that are worse than the current one:

Source: Cointelegraph. Table by author.

The main takeaway is that on all three occasions, Bitcoin recovered from these huge declines.

When you look at the reasons for the previous crashes, the current situation feels rather tame. In 2011, Mt. Gox -- a Japanese exchange that was responsible for roughly 70% of all Bitcoin transactions -- was hacked, which resulted in the theft of more than 800,000 Bitcoins.

And yet, Bitcoin not only recovered from this predicament but surged to new highs in the years following.

If Bitcoin can survive an event as detrimental as a 99% crash, I have no doubt it can recover from the current bear market and macroeconomic headwinds.

The next halving could push Bitcoin to a new all-time high

Perhaps the most important catalyst in the near term is the next halving, which is scheduled to take place in the second quarter of 2024.

Halving refers to an event that occurs roughly every four years. Bitcoin's protocol requires that after every 210,000 blocks are mined, the reward given to miners is cut in half. In the early days, miners were rewarded with 50 bitcoins every time they solved a problem.

Fast forward to today, and miners are receiving 6.25 tokens, and that number is scheduled to be cut in half in about 18 months. It doesn't take a genius to understand that if fewer Bitcoins are being rewarded to miners, the value of those coins is likely to rise. It's simple supply-and-demand logic.

If we look at past halvings, we see how this premise played out:

Source: Investopedia. Chart by author.

The light at the end of the tunnel

Bitcoin recently has been lumped into a broad basket of risky investments and, as such, the market has hammered it. But investors should also understand that the market is a leading indicator, and it recovers before the broader economic environment.

It's entirely possible that we could see a resolution in supply chain constraints caused by the pandemic and the Russian invasion of Ukraine in the next 12 to 24 months, which would ease the rate of inflation. This would likely prompt the Federal Reserve to shift its rate-hiking strategy and could very well be the catalyst growth investors have been waiting for.

Considering that Bitcoin has tracked growth stocks almost in lockstep during the past year, the next halving and a potential decline in inflation could send the coin's price surging.

^IXIC data by YCharts.

While we can only speculate on the macro environment, we can be certain that the Bitcoin halving will occur sometime in 2024. And if history is any indicator, this is likely to be good news for its price.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Mark Blank has positions in Bitcoin. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Bitcoin. The Motley Fool Australia positions in and recommends Bitcoin. 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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After Tesla's (NASDAQ: TSLA) recent three-for-one stock split, you might be wondering if now is the ideal time to buy Elon Musk's dynamic electric vehicle (EV) company.

The split has not been beneficial for the stock; its price has declined nearly 10% since it took effect.

But that decline likely has more to do with the larger market selloff since concerns around prolonged inflation continue to punish equities.

Long-term investors understand that declining stock prices create potential buying opportunities. So with the tech-heavy Nasdaq Composite also down more than 10% over the last few weeks, what is the better opportunity right now: Tesla or a Nasdaq index fund?

If you're an investor with a strong stomach for volatility, I believe Tesla offers greater potential due to its many similarities with other once-in-a-generation stocks.

Unmatched efficiency

Many of the greatest companies today have one thing in common: They flip traditional business models on their heads.

Tesla has done this in many ways, but none are more apparent than its manufacturing efficiency. This has largely been accomplished by Musk's first-principles approach to building his cars.

Atomic Habits author James Clear defines first principles thinking as "... the act of boiling a process down to the fundamental parts that you know are true and building up from there."  

The average automobile consists of about 30,000 parts. By contrast, the Tesla Model 3 is made up of around 10,000 parts, and the drivetrain has only 17 to 18 individual pieces compared to a standard internal combustion engine, which has around 200 parts.

Tesla has been able to achieve this manufacturing efficiency through its Giga Press, a large-scale die-casting machine. Instead of casting thousands of individual parts and welding or gluing them together, the Giga Press can produce large portions of the car in a single cast.

For example, the entire rear section of the Model Y is cast in a single mold, which would traditionally consist of over 70 individually produced parts. This innovation alone eliminates approximately 300 robots and reduces the body shop's space by 30%.

This manufacturing efficiency can be seen in the company's operating margins, which significantly beat the competition.

TSLA operating margin (TTM). Data by YCharts. TTM = trailing 12 months.

Tesla is a data company

The biggest oversight many investors make when analyzing Tesla is thinking of it as simply a car manufacturer. You've likely seen the various articles pointing out that Tesla's market capitalization equates to roughly all of the other major automobile manufacturers combined.

While Tesla's leadership in the EV space certainly contributes to its lofty valuation, I believe the main justification has more to do with its data-centric business model.

Tesla vehicles are essentially computers on wheels, and just like all of the best companies today, the company is leveraging the data captured by its computers to maximize its value proposition.

This is clearly seen in its push toward autonomous driving. While Musk has been infamously overly optimistic about the release of the company's Full Self Drive (FSD) feature, Tesla has been beta-testing it for nearly two years and recently surpassed over 100,000 vehicles on the road actively testing the software.

For reference, Alphabet's (NASDAQ: GOOG)'s Waymo, a major competitor in the autonomous driving space, has an estimated 600 autonomous vehicles being tested on the road today.

FSD is built on a foundation of machine learning, so each mile driven by owners is in theory enhancing its capabilities. Tesla's lead in testing autonomous vehicles is just one example of how it's using its proprietary data as an advantage over its competitors.

Other examples of the company's use of data capture can be seen in its metric-based insurance product as well as its over-the-air software updates.

While the valuation is lofty, the profits are flowing

Tesla's valuation is without a doubt the biggest concern for buying the stock. With a price-to-earnings (P/E) ratio of over 100, there's not much of a claim that the stock is cheap.

But while that valuation is high, consider how drastically the P/E has been reduced over the last few years:

TSLA PE ratio. Data by YCharts.

This is in part due to the pullback in the overall market, but it's also a result of Tesla's dramatically increasing profitability.

Data source: Tesla. Table by author.

Tesla isn't a value play, but a bet on optionality. Even at today's lofty prices, I believe there is tremendous upside if the company delivers on its wide array of disruptive products (autonomous driving, robo-taxis, robotics, solar energy, and more).

Very few of the highest-valued companies today ever traded at traditionally cheap valuations. There is certainly risk baked into this investment, but the range of potential outcomes for Tesla is astronomical, and it reminds me a lot of another high-flying technology company that was critiqued for years as being massively overvalued.

It's Amazon, whose founder, like Elon Musk, also sends rockets into space.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Mark Blank has positions in Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Tesla. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

In July, inflation slowed from 9.1% to 8.5%, which offered some badly needed relief to the American consumer. Additionally, the labor market added over 500,000 jobs while maintaining an unemployment rate of just 3.5%.

If a recession is underway, someone forgot to tell the economy.

With the recent positive news, you might be wondering: Is now a good time to buy stocks? The truth is, if you're a long-term investor, it's always a good time to put money in the stock market. And while I personally think this is a great entry point for investors, there are a few things you should consider before investing your money.

Do you have an emergency fund?

An emergency fundis a cash reserve you can fall back on in case of unforeseen circumstances. Financial advisors typically recommend you hold enough cash to cover three to six months of expenses before investing, but it really depends on your personal risk tolerance.

If you need eight months of expenses saved up in order to sleep at night, then that's what you should have in your emergency fund before you put your capital to work.

Will you need the money in the next three to five years?

Another thing to consider before investing your hard-earned money is when you'll need that cash again. Ideally, you shouldn't invest money that you anticipate needing in the next three to five years, preferably longer.

Obviously, you can't predict the future (hence the emergency fund), but if for example, you know you are planning to buy a house or sending your kids to college in the next few years, you should not invest that money.

The market is unpredictable, so investing capital you will need in the near future can be a recipe for disaster.

Do you have high-interest debt?

Investing your savings while simultaneously paying off high-interest debt such as credit card debt is sort of like swimming in a riptide. It's a whole lot of effort for very little progress.

If the S&P 500 returns on average 10% annually, but the interest on your credit card balance is 18%, it makes more financial sense to pay off your debt first instead of buying stocks.

This is not a universal rule, but if the interest rate on your debt is higher than your anticipated rate of return, you should pay off the debt before investing.

Have you educated yourself about investing?

The last thing to consider is if you've spent the time to understand the stock market before diving in. Fear of missing out (FOMO) can often cause stock market newcomers to rush into positions before they really understand the mechanics of the market and companies they're investing in.

Horror stories of beginners accumulating huge margin debts or losing years of savings due to a lack of knowledge are all too common, so you want to be sure you understand the basics before buying your first shares.

Fortunately, there are investment vehicles such as low-cost exchange-traded fund (ETF)s, which require less research to understand. The beauty of the ETFs is a complete amateur can go from knowing nothing about investing to owning a piece of the best companies in the U.S. by buying an ETF such as the Vanguard 500 Index Fund ETF, all in a span of 30 minutes or so.

And despite numerous recessions, natural disasters, and the endless pessimism from the financial media, the stock market has continued to reward patient long-term investors:

Data by YCharts.

The bigger risk is actually not investing.

According to a study from Bank of America, the return of the S&P 500 between 1930 and 2020 was nearly 18,000%. But if you removed the 10 best trading days from each decade in that period, the return falls to just 28%. That means investors are better off holding on long term rather than jumping in and out of the market.

Net buyers of stocks are the ultimate winners

The undefeated stock market strategy is to simply be a net buyer of great companies regardless of market conditions.

Don't believe me? Just ask the greatest investor of all time, Warren Buffett.

At a Berkshire Hathaway (NYSE: BRK-B) annual meeting in April, Buffett said:

I don't think we've [referring to Vice Chairman Charlie Munger] ever made a decision where either one of us has either said or been thinking: 'We should buy or sell based on what the market is going to do.'

Buffett understands that if you hold great companies long enough, the risk declines over time. According to MSCI, the probability of positive returns on an investment in the S&P 500 that's held for at least 10 years is about 95%.

Whether you plan to buy a basket of diversified stocks or purely low-cost index funds, now remains a great opportunity to invest in the market to build toward financial independence.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Bank of America is an advertising partner of The Ascent, a Motley Fool company. Mark Blank has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway (B shares). The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool Australia has recommended Berkshire Hathaway (B shares). 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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After you've been investing for a while, you begin to see the bright side of share-price declines, because they often present opportunities to buy great companies at discounted prices.

Not every beaten-down stock is a good investment, though. Sometimes, stocks fall for good reason, and buying them after a significant crash is actually a value trap instead of a bargain opportunity.

To avoid catching falling knives, you have to be able to distinguish the quality companies the market is overlooking from the struggling businesses that will likely continue to face challenges. To that end, I never invest in beaten-down companies if I see these two red flags:

1. The company will likely need to raise more money to fund operations.
2. The business is facing secular headwinds.

Let's unpack these two concepts by looking at an example: Peloton Interactive (NASDAQ: PTON).

Avoid zombies like the plague

A zombie company is a business that is on a path toward insolvency unless it manages to raise additional capital, either in the form of an additional equity offering (selling more stock) or by taking on new debt.

These companies are completely dependent on new capital injections to survive, and when interest rates start to rise and the market becomes more averse to risk, they're often forced to take on new debt at very unfavorable interest rates, exacerbating their balance sheets woes.

Peloton has certainly struggled in the last year with demand dropping off a cliff and operating expenses rising.

This led Dave Trainer, the CEO of the research firm New Constructs, to say the following in a recent publication: "Peloton's issues are well telegraphed -- given the stock's decline over the past year -- but investors may not realize that the company only has a few months' worth of cash remaining to fund its operations, which puts the stock in danger of falling to $0 per share."

Trainer's harsh comments are substantiated when you look at the company's shrinking cash position:

Data source: Peloton earnings reports. *Includes cash equivalents and short-term investments.

The interactive fitness specialist is also burning cash at an accelerated rate, going from free-cash-flow positive in 2020 to reporting negative free cash flow for five straight quarters. And the fiscal third quarter saw the biggest outflow yet of $746.7 million.

While Peloton's newly appointed CEO, Barry McCarthy, is hoping to pull off the comeback of the decade, Peloton is a company that may soon be raising capital in an environment where doing so is no longer cheap.

Pass on businesses operating in declining markets

Another major red flag is when a company operates in an industry with major secular headwinds. Peloton had a tremendous first-mover advantage which it cashed in during the pandemic as the connected-fitness industry enjoyed a surge in popularity. But as things have started returning to normal, the at-home fitness sector has experienced a complete reversal with waning demand, which is visible in Peloton's rapidly slowing revenue growth.

Data source: Peloton earnings reports.

And Peloton is not alone. Rival fitness brand Nautilus recently announced a 70% decline in sales in the most recent quarter, while the parent company of NordicTrack scrapped its plans to go public this year among various rounds of layoffs.

The at-home fitness equipment industry may eventually live up to the hype, but for the foreseeable future, it faces an uphill battle as fitness enthusiasts elect to return to gyms and outdoor activities.

Buy the dip, but do it intelligently

I'm a huge proponent of buying beaten-down stocks as long as they're high-quality companies. And to determine that, you need to be on the lookout for red flags.

As you can see with Peloton, the potential need to raise capital to fund operations (especially when interest rates are rising) and major industry headwinds are two indications the stock could be a falling knife instead of a diamond in the rough.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Mark Blank has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Peloton Interactive. The Motley Fool Australia has no position in any of the stocks mentioned. 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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Have you noticed that Apple's (NASDAQ: AAPL) stock is almost always priced somewhere between $100 and $500, and yet the company has consistently delivered tremendous returns for its shareholders over the years?

Why isn't the stock price higher?

This is because Apple has repeatedly split its stock whenever the price ran up beyond a certain price. In a stock split, a company divides existing shares in order to lower the price per share. Imagine a pizza that has been cut into six slices. If you were to cut each slice in half to make 12 slices, the pizza itself wouldn't get any bigger; you'd just have two smaller slices for each original slice. 

That's how stock splits work.

The main reason a company would want to split its stock is to make the share price more affordable to everyday investors and, in turn, boost liquidity.  

But since we know the stock split itself doesn't change the size of the pizza (i.e., the market capitalization of the company), should you consider buying companies after a recent split? 

Here are two reasons to buy stocks after a split and one reason not to.

1. You liked the company before the split was announced

The main reason to consider buying a stock after a split is announced is because you already liked the company prior to the split. A stock split is not an investment thesis.

It could, however, be perceived as an indication of a strong company since businesses don't typically split their stock when the share price has been crashing.

But overall, the stock split itself should not be the motivation for the purchase because it doesn't impact the intrinsic value of the company.

For example, if you're considering buying Alphabet (NASDAQ: GOOG)(NASDAQ: GOOGL) after its recent 20-for-1 stock split, the reasoning should be that the company has a nearly impenetrable moat due to its strong network effects and dominant brand recognition, or something similar.

You shouldn't buy the stock because you believe the split will somehow make the company stronger in any material way.

There is data to suggest splits can move the stock price upward over the short term, but for long-term investors, this shouldn't be viewed as a reason for buying.

2. You've done your research

The main issue with using stock splits as a catalyst for buying is it may lead you to buy a stock you've done little to no research on.

Stock research ought to be the foundation of your conviction, so if you're considering buying a stock after a split announcement, be sure you've done your homework.

For example, investors may be tempted to buy GameStop (NYSE: GME) after its recent 4-for-1 split. But if you're basing your purchase on the split alone, you'd be buying a wildly unprofitable company that has seen its stock completely disconnect from the underlying business due to its reputation as a meme stock.

In simpler terms, if you're buying GameStop because of the recent stock split, you'd be buying an extremely risky asset that appears to be moving mostly on speculation rather than business execution.

The dividing up of shares does not magically improve the prospects of the business, so if you're buying a stock split, make sure you've done adequate research, which has led you to believe the company is a quality business trading at a reasonable price.

Don't buy the stock thinking the split will add long-term value

Let's all say this together: Stock splits have zero impact on the underlying business.

Splits neither improve nor deteriorate the long-term potential returns of stocks. They might drive a short-term movement in the price, but they do not have any material influence over the long term.

Therefore, you should never buy a stock solely because the company announced a split. If you're considering buying a stock before or after a split, make sure you've done your research and developed a solid thesis for why you believe the business will outperform. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Mark Blank has no position in any of the stocks mentioned. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), and Apple. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

A company's leadership is certainly one of the most important factors in its success. The decisions made by C-suite executives quite literally have million- and even billion-dollar implications for the business.

And without a doubt, Amazon's (NASDAQ: AMZN) leadership over the years has been one of the best in business.

If you want to find companies with Amazon-like leadership teams, consider these three qualities that have driven the company's dominance.

1. A culture of experimentation

Recently, I dived into Amazon's storied history and unpacked just how important optionality has played in the company's success. This optionality comes from a culture of experimentation.

In a 2014 interview, founder Jeff Bezos once said, "What really matters is, companies that don't continue to experiment, companies that don't embrace failure, they eventually get in a desperate position where the only thing they can do is a Hail Mary bet at the very end of their corporate existence."

The focus on innovation through trial and error is well-documented throughout Bezos' many shareholder letters. While many companies claim to prioritize innovation, Bezos recognized true innovation meant there would be big failures.

One of Amazon's biggest failures was the Fire Phone. The company invested over $170 million into the product in 2014, and it completely whiffed, selling just 35,000 units in the first month after the launch.

In the 2019 shareholder letter, Bezos explained why he's OK with massive failures like this, saying: "This kind of large-scale risk-taking is part of the service we as a large company can provide to our customers and to society. The good news for shareowners is that a single big winning bet can more than cover the cost of many losers."

Without embracing potential flops, Amazon would likely have never produced some of its best products and services, like the Echo or Amazon Web Services.

You can get a sense of how much emphasis a management team places on experimenting and innovation by listening to earnings calls or reading through shareholder letters.

2. Customer obsession

Amazon's leadership team uses a strategy they call "working backwards". Instead of starting with competitor products or those with the highest margins, they simply consider, "What does the customer want?" and then work backward from there to design exceptional products and services.

This obsession with the customer has driven decades of great decision-making by the leadership team. And Bezos has long attributed it as the primary reason for Amazon's success, saying, "The No. 1 thing that has made us successful by far is obsessive-compulsive focus on the customer as opposed to obsession over the competitor."

At the end of the day, customers drive revenue, and companies that maintain an intense focus on customer service have a knack for winning over the long run.

3. Publicly-stated, ambitious goals

Excellent companies are very often led by management teams with ambitious goals. Amazon's first slogan was "the world's largest bookstore". Despite Barnes & Noble taking offense to this and suing the company back in 1997, this slogan represented the grandeur of Bezos' vision for the company.

He could have used a simple slogan like "the first online bookstore", but he publicly stated his global ambition even in the company's early days.

Amazon's mission statement today is "to be Earth's most customer-centric company" and it has a corporate vision statement "to be Earth's best employer and safest place to work", in response to harsh criticism of brutal working conditions in its distribution centers.

Notice the global theme in the company's goals. This ambition is critical to achieve even a fraction of the growth and dominance of Amazon.

Another public company with an eccentric (and often polarizing) CEO that has stated very ambitious goals is electric vehicle maker Tesla, led by Elon Musk.

The company's mission is "to advance the world's transition to sustainable energy". With the recent expansion of its "gigafactories" into China and Europe and its industry-leading deliveries, Tesla appears to be executing on this ambitious goal.

Studying Amazon makes you a better investor

Identifying the next Amazon is no easy task as it's clearly a generational company. But studying this e-commerce juggernaut provides a treasure trove of insights into the qualities shared by other great companies.

When analyzing businesses, look for management teams that embrace experimentation (and failure), have a deep focus on the customer, and are public about their ambitious goals for the future.

Incorporating these qualities into your management analysis can lead you to discover the next market-beating stock.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Want to invest in management teams like Amazon's? Here's what to look for appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Mark Blank has positions in Tesla. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Amazon and Tesla. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Investing in stocks is not for the faint of heart. Unlike other asset classes -- like real estate -- where investors rarely experience extreme volatility, the stock market has a tendency to test the emotional fortitude of its participants.

And 2022 is just the latest episode in the saga.

With the S&P 500 declining as much as 23% year to date and its tech-heavy cousin, the Nasdaq Composite, down even more, there are investors who will likely leave the market for good in the coming weeks (if they haven't already). In fact, a recent survey by Allianz Life found that 43% of investors are too nervous to buy stocks at current levels.

But if the goal is to buy low and sell high, why would investors be hesitant to buy when stocks are cheap?

This is the investor's dilemma. We all say we are going to buy when the market is down, and yet when the opportunity presents itself, we find it difficult to pull the trigger. Here are three reminders to help you stay the course so your portfolio can come out of this bear market on top.

Net buyers of stocks win long term

One of the simplest reminders to calm one's nerves during a bear market is that the market has never failed to recover from past crashes.

Consider the chart below that tracks the overall returns of the S&P 500 and Nasdaq as well as their all-time highs over the past several decades.

Data by YCharts.

This chart might be a bit confusing at first glance, but it's actually pretty simple. The straight horizontal lines represent the period of time between all-time highs in both indices.

There are two important takeaways:

1. Both indices have recovered from every crash to reclaim their all-time highs and surge even higher.
2. There have been extended periods of time for both indices before those all-time highs were recovered.

The second takeaway is not as uplifting, but it should actually be the bigger motivator to keep investing through bear markets. If you are planning to wait until the market recovers to begin investing, just know you could be waiting more than seven years based on the S&P 500's longest recovery.

Even worse, the tech investors who exited the market after the dot-com bubble missed out on nearly 300% of Nasdaq gains over the next 15 years:

Data by YCharts.

Finally, here are a couple more stats to support remaining a net buyer of stocks today:

• Half of the market's best trading days take place during bear markets.
• Midterm election years tend to be brutal for stocks, but the average gain in the S&P 500 the following year is 32% (according to LPL Research).

Buying what you know gives you an edge

When the market gets me down, I often turn to the words of legendary mutual fund manager Peter Lynch.

He said the following about using your unique edge when buying stocks:

People have incredible edges and they throw them away [...] If you'd worked in the auto industry -- let's say you have been an auto dealer for the last 10 years -- you would have seen Chrysler come up with the minivan. If you were a Buick dealer, a Toyota dealer, a Honda dealer, you would have seen the Chrysler dealership packed with people. You could have made 10 times your money on Chrysler a year after the minivan came out.

Lynch's point is instead of chasing hot stocks, look for companies in your area of expertise.

People are more than willing to pile money into industries they know nothing about because the rest of the market is doing so, even when there are huge opportunities in their own fields of expertise.

So, if you're feeling frightened about putting money in the market right now, consider looking at stocks where you have a unique advantage. To be honest, this is good advice in any market cycle, but it can give you the conviction you need to keep investing during bearish periods.

Put on your contrarian hat

To succeed in investing, it can pay off looking at the market in a contrarian way. And in a bear market, there are tremendous opportunities to be a contrarian.

Right now, many investors are throwing out pretty much all technology companies. The market is collectively saying that because inflation is higher and interest rates are on the rise, technological growth will stall for the foreseeable future.

Much of this is muscle memory from the dot-com crash when hundreds of companies went public with weak to nonexistent underlying business models. But many of the technology companies that have sold off this past year are highly profitable and driving society forward in the digital world.

I doubt rising interest rates will significantly deter this advancement, and investors buying up quality growth companies at cheap prices will likely reap the rewards in the future.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Your portfolio vs a bear market: How to come out on top appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

When analyzing the quality of companies, investors often focus on financial metrics such as earnings growth or the strength of the balance sheet. And while financial metrics are certainly an integral part of any investment analysis, investors can benefit by looking at nontraditional statistics to find high-quality businesses.

Two areas that are often indicators of an excellent company are employee and customer satisfaction. Great businesses aim to maximize value for all stakeholders, not just the shareholders.

Two metrics investors can use to measure customer and employee loyalty are net promoter scores and Glassdoor ratings.

Net promoter scores

The net promoter score (NPS) is a measurement of how likely a brand's customers are to promote it to others. It's produced by conducting a simple survey asking how likely a customer is to recommend the product or service to a friend.

Not every company will take the time to conduct these surveys, but those serious about their brand image will hire outside marketing firms to survey their customers on an annual or semi-annual basis. 

The NPS is derived by subtracting the percentage of detractors (not likely to recommend the product) from the percentage of promoters (very likely to recommend). The resulting score ranges from negative 100 to 100.

A negative score is a big red flag as that means the majority of customers would not recommend the product, while a score of greater than 60 is generally considered the mark of a highly regarded brand.

Marketing firm Invesp estimates word-of-mouth promotion accounts for $6 trillion in annual consumer spending and is five times more effective than paid marketing. So, a high NPS score not only indicates customers love a company's products, but also means the business likely needs to spend less on marketing to drive sales.

To find a company's NPS, you'll have to do some digging. The company's investor relations page is a good place to start, as businesses with high scores will often share them in presentations or shareholder letters.

There are also companies like Comparably, which conducts its own independent NPS surveys on hundreds of major brands.

Footwear apparel company Allbirds (NASDAQ: BIRD) shared its impressive net promoter score of 86 in its most recent investor presentation. The customer loyalty for this brand is best in class, which is why the company reports over 50% of its revenue comes from repeat customers.

The strength of a company's brand can be difficult to measure by simply looking at financials. But fortunately, net promoter scores offer investors an alternative metric to gauge customer sentiment.

Glassdoor ratings

Employee happiness is another great indicator of a strong business.

Glassdoor provides incredibly valuable insights into a company's employee sentiment. You can read employee reviews, see how likely they are to recommend their employer to a friend, and even find the percentage of employees who approve of the CEO.

This is a wealth of data that many investors miss by exclusively looking at financial statements during their research. Many of the top companies in the world, such as Alphabet (NASDAQ: GOOG) and Amazon.com (NASDAQ: AMZN), have remained industry leaders for years because of their ability to attract top talent to their employee ranks.

In 2021, Gartner (NYSE: IT) found that 48% of companies in a survey had serious concerns about mass turnover. Employee turnover is not only extremely costly, but it can also be highly disruptive to the company's execution.

Thus, positive Glassdoor reviews and ratings can give investors confidence that a business is both attracting and, more importantly, retaining top talent.

Zoom Video Communications (NASDAQ: ZM) is a perfect example of a business with incredibly high Glassdoor metrics. Some 88% of employees say they would recommend the company to a friend, and a staggering 94% of employees approve of CEO Eric Yuan.

While the company's stock has taken a beating due to the recent risk-off sentiment in the market, the Glassdoor reviews show a strong company beloved by its employees.

Outside-the-box thinking

Long-term investors can give themselves an edge by thinking outside the box when conducting their research. Net promoter scores and Glassdoor reviews are two ways you can gain unique insights into the strength of a business in pursuit of market-beating returns.

Just remember, as with traditional metrics like those found on the balance sheet or income statement, it's important to consider the whole picture of a business and not make investment decisions based on a single attribute or number.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Zoom Video Communications. The Motley Fool Australia has recommended Alphabet (A shares), Alphabet (C shares), Amazon, and Zoom Video Communications. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Market pundits are comparing the recent throttling of technology stocks to the Dot.com bubble of the early 2000s. With the tech-heavy Nasdaq Composite down nearly 30% year to date, its easy to see why. But there's a key difference between the two crashes. At the turn of the millennium, many internet companies saw their stock prices skyrocket purely on speculation.

The majority of these companies lacked any meaningful revenue to show their business models could be substantiated. In other words, they didn't really have business models -- just plans (see Pets.com). The CEO of UBS, Ralph Hamers, said this at the recent World Economic Forum:

It is not like 20 years ago. We had some models that were just models on paper and not real. In the last 20 years, we have been able to show that there are real changes happening in retail businesses, in financial businesses etc., and that trend is not going to stop because of what we see currently.

In the Dot.com meltdown, most internet companies were wiped out with the exception of a few mega winners like Amazon (NASDAQ: AMZN) and Booking Holdings (NASDAQ: BKNG).

Because many of today's technology companies have proven business models, dozens of huge winners -- instead of a handful -- will come out of this valuation compression. And being able to distinguish the cream of the crop will be key for investors. 

To that end, let's unpack two really important metrics for analyzing technology-driven businesses: recurring revenue and dollar-based retention rate.

Recurring revenue creates predictability and optionality

Recurring revenue is the backbone of every subscription company. Unlike one-off sales, recurring revenue is stable and can provide a high degree of predictability that you don't get with lumpy revenue models.

The superiority of a recurring revenue business model is perfectly showcased in Adobe (NASDAQ: ADBE)'s switch nearly 10 years ago from selling its software through priority licenses to cloud-based subscription access.

At first, the company struggled as customers tried to navigate the change. But within 3 years, the company was producing more annual revenue than ever, and 20% of its customer base was made up of first-time Adobe users.

So why is recurring revenue a strong indicator of a superior business?

Well, first of all it's sticky. Just think of all the subscriptions you're paying for right now that you rarely think about (and maybe even rarely use!). Second, it allows management teams to spend less time forecasting their yearly revenue and more on enhancing their services and expanding customer spending.

Getting customers to upgrade a one-time purchase is extremely difficult, but convincing them to upgrade a subscription to instantly unlock new features is much more compelling.

Today, 93% of Adobe's total revenue is recurring, and in turn, the company has seen its operating margins balloon from 10% to over 30% since making the switch.

The ability of technology companies to focus on innovating and expanding their product offerings by using a recurring revenue model is one of the primary reasons beaten-down growth stocks look much more resilient today than those of the early 2000s. 

High retention indicates strong demand

Dollar-retention rate is a key indicator of quality because it showcases software demand and loyalty from existing customers. The metric not only reflects churn (cancelled subscriptions) but shows when customers are increasing their spending on the platform.

This is immensely important because getting your existing customers to spend more is much cheaper than trying to land new customers. In other words, high dollar retention equates to improving margins. So, what would be considered high retention?

First of all, anything under 100% should be a red flag that indicates the company is losing revenue from its existing customers (either due to subscription downgrades or churn). Anything over 100% indicates the business is retaining its customers and deriving more revenue from them.

Robotic process automation leader, UiPath (NYSE: PATH), reported a dollar-based net retention rate of 138% in its most recent investor presentation. This means that over the last quarter, the company increased revenue from existing customers by an impressive 38%.

You can compare a software company's retention rate to that of its competitors to see how their product stacks up. Appian (NASDAQ: APPN), which offers low-code automation solutions, posted a much lower subscription retention rate of 117%, further substantiating the quality and demand of UiPath's. 

It's also worthwhile to compare the current retention to past reports. Consistently declining retention is likely a red flag. In the case of UiPath, there was a quarter-over-quarter decline from 145% to 137%. The company's management team attributed this to macroeconomic headwinds, such as the war in Europe, and reduced enterprise budgets.

While a single-quarter decline is probably not a reason to write off the company, this trend should be monitored closely moving forward.

All in all, a high retention rate indicates that existing customers are sticking around and increasing their spending, which will ultimately improve the company's bottom line.

Technology companies are stronger today than in the early 2000s

There are countless similarities between the tech-fueled crash of 20 years ago and the one currently unfolding. But I think this has created opportunity for investors. Technology businesses today are very clearly stronger than those of twenty years ago, and while there may be more near-term pain for growth investors, there will likely be a high number of big winners once we emerge from this bear market.     

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Understanding these 2 metrics will make you a better growth investor appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• How to build a $500,000 ASX share portfolio in 25 years
• 3 ASX 200 shares for smart investors in May
• Morgans names 3 ASX 200 gold shares to buy
• Where to invest $10,000 in ASX ETFs in May
• Here are the top 10 ASX 200 shares today

Mark Blank has no position in any of the stocks mentioned. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Adobe Inc., Amazon, and Booking Holdings. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended the following options: long January 2024 $420 calls on Adobe Inc. and short January 2024 $430 calls on Adobe Inc. The Motley Fool Australia has recommended Adobe Inc., Amazon, and Booking Holdings. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

There's no such thing as a guarantee when it comes to investing. Whether you're investing time, money, or energy, there's always a risk that things won't work out.

That being said, there are some things that are no-brainers for investors looking to get ahead.

In a rough stock market, here are five investments you can make that are nearly guaranteed to produce net positive returns in your life.

1. The S&P 500

It might not be tomorrow, next week, or even next year, but if history is any indicator, the S&P 500 is headed to higher ground over the long run.

When the market turns sour, like it has recently, it's helpful to look at a historical chart of the S&P 500 for some much-needed perspective.

^SPX data by YCharts

The takeaway is pretty simple: Investing in the 500 largest companies in the U.S. proves to be a net positive if you give it enough time.

2. Side hustles

Side hustles are one of the easiest ways to increase your income. From walking dogs to driving for Uber or Lyft, imagine what you could do with an extra 10% to 15% more every month. That money could mean a much-needed vacation, strengthening your emergency fund, or extra cash to invest for your future.

Side hustles are also a great entryway into entrepreneurship. The risk of quitting your job to start your own businesses is high, but working a side hustle on the weekends is relatively low risk, and if you're willing to put in the work, it certainly can become a full-time gig someday.

Twitter, Slack (now part of Salesforce), and Craigslist are some notable companies that started off as side hustles for their founders.

3. A higher salary

One of the quickest ways to increase your wealth is to increase your salary. The problem is, most people approach this investment the wrong way.

Instead of simply asking for a raise, you should approach the issue in a more strategic way.

Even if your boss is sympathetic to predicaments such as higher costs of living, companies are in the businesses of making money, so the boss will likely not be compelled to give you a raise. You're much more likely to be successful by pitching an idea to your boss that will add value to the business and make everyone's life easier. The two most obvious ways of doing this are cutting costs and increasing sales.

The simple pitch might look something like this: "If I can accomplish X, which will bring in more money for the company, can I get a raise?"

You'll have to be creative, but if you can figure out how to add more value to the business, a higher salary is likely to follow.

4. Investing knowledge

Stock market crashes can be humbling. Many decide to leave the markets for good, but smart investors use bear markets as an indication to get smarter about investing.

Increasing your knowledge on topics like writing an investment thesis, analyzing financial news, and researching stocks will have a huge positive impact on your long-term portfolio performance.

5. Things that bring you joy

While it might not show up on a profits and losses chart, investments in things that bring enjoyment into your life can certainly pay dividends for your health and overall happiness. 

Pursuing new hobbies, spending time with family and friends, or starting new non-work-related projects not only adds variety and balance to your life, but it also lets your brain get away from the markets for a while. And for long-term investors, getting away from the constant short-term-focused stock market coverage can be a powerful advantage.

Whenever we allocate resources, we are investing

Buying stocks or other assets is not the only definition of investing. Whenever you allocate resources into something, that's an investment. Along with money, our most precious resources are time and energy, and the way we spend them can have massive implications for our overall health and happiness.

The Oracle of Omaha, Warren Buffett, said it best: "The most important investment you can make is in yourself."

Investing in yourself is at the heart of becoming smarter, happier, and richer. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post 5 surefire investments you'll thank yourself for later appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• How to build a $500,000 ASX share portfolio in 25 years
• 3 ASX 200 shares for smart investors in May
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• Here are the top 10 ASX 200 shares today

Mark Blank has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Salesforce, Inc. and Twitter. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Uber Technologies. The Motley Fool Australia has recommended Salesforce, Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

For the last several decades, a curious statistic has kept popping up in various studies all over the world. It seems women tend to generate a consistently higher rate of return than men when it comes to investing.

This was first reported by a research team from the University of California at Berkeley. The research found that, out of 35,000 brokerage accounts observed over six years, the female investors outperformed the males by over a percentage point.

As if a sample population of that size wasn't enough, several other research projects have reported similar findings, most recently Fidelity. It found that out of a group of 5 million Fidelity customers, women outperformed men by nearly half a percentage point over a 10-year period.

Those percentages might not sound like a substantial outperformance, but over decades, the result can be tens of thousands of extra dollars in your account.

The reason behind the outperformance

Vanguard's 2022 How America Saves report sheds light on the disparity by explaining that women tend to trade 50% less than men. In other words, men are moving in and out of positions at a 50% higher rate than women.

That might not be the only reason behind the disparity in returns. But the fact that men are trading stocks at a much higher rate has to be one of the main drivers.

Why overtrading hurts your portfolio

Investing is a unique discipline in that the more you "do things," the worse your performance tends to be.

The late founder of the Vanguard Group, Jack Bogle, talked about the harm trading does to returns in his book The Clash of the Cultures: Investment vs. Speculation, where he attributes it to mutual fund underperformance: "In the mutual fund industry, for example, the annual rate of portfolio turnover for the average actively managed equity fund runs to almost 100%, ranging from a hardly minimal 25% for the lowest turnover quintile to an astonishing 230% for the highest quintile."

100% portfolio turnover means the portfolio looks entirely different from one year to the next. If the goal is to own great businesses for long periods of time, it's no wonder mutual funds have underperformed with astronomically high turnover rates.

Trading deactivates your greatest advantage

The biggest reason to trade minimally is because the more you trade, the less compounding your portfolio will experience. Compound interest works in favor of patient investors because it starts slowly but snowballs over long periods of time.

Even the greatest investor of our time, Warren Buffett, earned 99% of his wealth after his 50th birthday, which demonstrates how incredibly powerful compound interest is if you're patient enough to experience it.

Unfortunately, many investors are more interested in chasing the next sector or stock they think will blow up in the near term than in holding high-quality companies for the long term.

Bogle took this to heart as he pioneered low-loss, low-turnover index funds and frequently made statements like this: "Every piece of data that's ever been produced says that trading is the investor's enemy. The more you trade, the less you make."

Conclusion: Invest like a woman

I'm sure there are deeper psychological or behavioral conclusions we could draw from the gender disparity in investment returns, but for us Fools, the message that is screaming at us is to think long and hard before tinkering with our portfolios.

If there is an inversely proportional relationship between trading and portfolio performance, then we should all strive to invest more like women do. And unlike many things in life, fortunately that means doing significantly less instead of more. 

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The post Women investors often outperform men, and here's the simple reason why appeared first on The Motley Fool Australia.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

More reading

• How to build a $500,000 ASX share portfolio in 25 years
• 3 ASX 200 shares for smart investors in May
• Morgans names 3 ASX 200 gold shares to buy
• Where to invest $10,000 in ASX ETFs in May
• Here are the top 10 ASX 200 shares today

The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.