Trying to make a million in the stock market isnt that hard if you have a rigorous savings plan in place and time on your side. However, most investors fail to hit this key benchmark for one simple reason; theyre trying to be too smart.
Warren Buffett and his right-hand man Charlie Munger have made tens of billions of dollars by investing in the stock market, and if you read through their annual correspondence to investors, as well as listening to interviews with these two mega-investors, it becomes clear that a large part of their strategy is based on simplicity.
You dont need to be a genius
Munger is the most prominent advocate of simplicity in investing.
Before Buffett and Munger became partners, Buffett was content with his strategy of buying stocks trading at deep discounts to intrinsic value. However, Munger convinced him to change his approach to purchasing high-quality businesses at reasonable prices, sitting back and watching the money roll in.
This investment style isnt glamorous (most of the time theres nothing to do), but its highly profitable. As my Foolish colleagueZach Coffell highlighted in an article last year, Munger claims that the key to successful investing is todo nothing 99% of the time, butaggressivelyseize the 1% opportunity.
But there are to otherelements to Mungers strategy that are often overlooked.
Dont be stupid
Investing in the markets best companies is relativelyeasy compared to the desire to chase investment fads and trends. Thats why Munger believes that the single most crucial element of an investment strategyis to be nonidiotic, or to put it another way, in order to be a successful investor you have to avoid making stupid mistakes.
This might seem obvious at first, but its hard to put into practice. For example, theres an overwhelming volume of research which shows that cheap stocks outperform the market over the long run. However, the data also shows that during the depths of the financial crisis, when equities were trading at the lowest level in a decade, investors were rushing for the exits. Buffett and Munger, knowing that the data was correct, dived in and have made billions as a result.
Being non-idiotic also means avoiding highly speculative investments.
Most companies trading on the AIM market are highly speculative and in their early stages of growth. The risk of a total capital loss here is high, and the chances of you finding a 10- or 20-bagger are slim. So, why take the risk?
If the odds are stacked against you, youre taking an unnecessaryrisk. If experienced investors such as Neil Woodford struggle to find winning small caps or private early-stage businesses, then individual investors will really struggle.
Stick with what works
Mungers strategy is about sticking to knowing what works.
We know investing in high-quality companies produces steady long-term returns with minimal risk of total capital impairment. So why should we try to beat the market using a strategy thats untested?
Investors cant control the market, but they can skew the odds of success in their favour by using proven strategies, not taking unnecessary risks, and letting the magic of compounding do all the hard work.
Want to achieve Buffett-like returns?
Realistically, most people won’t be able to build a Buffett-like fortune in their lives. However, by following just a few simple rules, you should have no problem growing your wealth and hitting your long term savings targets, whatever they may be.
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