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The Battle for Investment Survival

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Good investing is like golfing. Every player has a unique swing, yet all golfers must embrace the fundamentals of swinging -- keep your head down, rotate your body, and stay down on the ball -- to be successful.

Likewise, in the investing world, different people will always choose different stocks, but a successful track record requires adherence to simple fundamentals. You can be the most brilliant investor -- or golfer -- in the world, but brilliance doesn't mean much if bad decisions force you out of the game.

Reality check
Everybody likes a home-run stock that pays triple-digit returns to shareholders, but you can enjoy satisfactory long-term results simply by sticking to the basics. Consider that the historical return for stocks has averaged around 9% to 11% per year over the long term, yet most investors -- both individual and professional -- fail to outperform this benchmark over meaningful periods of time. By sidestepping the common mistakes and focusing on the fundamentals, you can help yourself avoid big losses and make the most from your winners.

At the top of your list should be a determination to invest in companies and situations that you understand. If you buy something you don't comprehend, you will bail out at the first hint of trouble, regardless of how serious the "trouble" really is -- and repeatedly abandoning investments just because of a little price volatility can lead to continuous losses. Besides, sticking to what you know reduces the possibility that you'll overlook certain risks that might slip by if you're not familiar with a given industry.

Dodge the debt
Walter Schloss, one of the world's most underrated investors, abhors debt. It may be OK for a company to take on a little bit of debt, but too much is always deadly. Although what constitutes "too much" varies across the board, what's certain is that once a company does take on debt, it gives up a little bit of its control to the lender. Simply watching out for debt is one of the biggest things you can do to help yourself as an investor.

One of my favorite examples in this regard is homebuilder NVR (NYSE: NVR  ) , which I consider the best in its industry. Although the problems facing the homebuilders go way beyond debt, NVR's debt-to-equity ratio sits at a solid 25%, compared with nearly 200% for rival Hovnanian (NYSE: HOV  ) . Beazer (NYSE: BZH  ) has a ratio well above 100%, and for Toll Brothers (NYSE: TOL  ) , the figure is 66%.

All homebuilder stocks have fallen sharply from their highs, but NVR, with its much lower debt-to-equity ratio, has experienced a less severe price decline than its peers have suffered. Moreover, the recent bounce among homebuilders has helped recoup some losses for NVR shareholders. When the industry picks up, NVR should be a solid bet for investors.

Pay your due diligence
As the saying goes, "Before you finish first, you must first finish." Similarly, before you can embark on the path to market-beating returns, you have to ensure that you'll last as an investor. You wouldn't buy a house or a car based solely on someone's tip without inspecting the product first for yourself. So why should you approach stocks any differently? It's helpful to see what the pros are buying and to keep a watch on the really successful investors, but if you're not performing your own checkup, your actions are more speculative than they are businesslike. And investing in a businesslike fashion offers the most prudent approach to a long, successful investing life. So keep swinging, but never lose sight of the fundamentals of what makes a great investor. 

Get a great deal on more value-creating Foolishness:

Fool contributor Sham Gad runs Gad Partners Funds, a concentrated, value-centric investment group modeled after the 1950s Buffett Partnerships. He eats his own cooking and will buy back your old dollar bills for two shiny quarters. The Fool has a hole-in-one disclosure policy.

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Related Tickers

10/20/2016 3:28 PM
BZH $11.25 Down -0.18 -1.53%
Beazer Homes USA CAPS Rating: **
HOV $1.61 Down -0.02 -1.23%
Hovnanian Enterpri… CAPS Rating: **
NVR $1574.02 Down -45.19 -2.79%
NVR CAPS Rating: ****
TOL $28.64 Down -0.31 -1.05%
Toll Brothers CAPS Rating: ***