The greatest investing minds on the planet use wildly different styles to achieve wealth-building results.
Pershing Square's Bill Ackman looks for distressed businesses with turnaround opportunities. ARK Investor guru Cathie Wood invests in innovative technology companies. Berkshire Hathaway CEO Warren Buffett wants to "to buy ably managed businesses, in whole or part, that possess favorable and durable economic characteristics." Fidelity Magellan Fund manager Peter Lynch suggests that you "buy what you know."
It's like comparing apples to bananas and kiwis. There are many roads to investing success, and only you can decide which investing style is the best for your experience, knowledge, and level of risk tolerance. But all of these master investors would agree on one thing.
In a perfect world, you would buy stocks at record-low prices, hold on to them for the perfect period, and sell them at the absolute peak of market success. Buy low and sell high -- that's how investing works, right?
Well, no. Yes, you want to buy stocks at sensible prices and sell them at a much higher price many years later, but you will always miss the perfect times to buy and sell. The real trick to successful investing is to select a strategy, put your money to work in the market for a long time, and hold on through the inevitable bumps in the road.
That's how the master investors built their success stories. They left the day trading, the knee-jerk reactions, and the perfectionism to the wannabes and the has-beens. The world's greatest fortunes were built on patience and discipline.
Let me show you how ineffective market-timing tactics can be. I'll highlight some examples from the recent history of semiconductor designer Advanced Micro Devices (AMD -0.35%).
The dream scenario: Massive gains
Let's say you started investing in AMD three years ago, picking up 100 shares of the stock on Aug. 22, 2019. AMD shares closed that day at $31.90, so your cost basis for this investment would be approximately $3,200.
Simply holding on to those shares through thick and thin would have tripled your money in three years, as AMD is trading for more than $90 per share nowadays. That's a fantastic return on your investment, compared to a measly 42% gain in the S&P 500 (^GSPC 0.02%) market index over the same period. We're talking about a value boost of $6,100 in three years.
But the chart also includes a steep drop, starting on Nov. 29, 2021. What if you sold your 100 shares just before the slide started, pocketing a total of $16,900? That's a total gain of $13,700, more than double the return of your basic buy-and-hold strategy.
Let's take another couple of steps. An absolutely brilliant trader could have nailed November's market top, held on to the cash until the deepest depths of the 2022 plunge, and reinvested the entire $16,900 stake in roughly 220 AMD shares on July 1. The stock has delivered a respectable rebound since then, gaining more than 21% in 10 weeks. Sitting out the big drop in this way would have lifted your modest $3,200 investment to a recent total of $20,430. That's another $3,530 in your pocket, compared to cashing out in November.
Back to reality: You won't nail those sharp twists
The perfect outcome above sounds thrilling, of course. A nip here, a tuck there, and you've boosted your three-year gains from $6,100 to $17,230. However, most investors didn't pinpoint each of these sharp turns with perfect accuracy.
I mean, how could they? AMD boosted its share prices in November with a robust third-quarter earnings report and the integration of AMD's ray-tracing model in Epic Software's popular game development platform, Unreal 5. Clear skies ahead, the company was on a roll.
Until it wasn't.
On Nov. 30, AMD investors suddenly felt inspired to sell their shares en masse. The company didn't do anything to deserve this negative shift. Instead, the drop was a part of a marketwide reaction to the emerging omicron variant of COVID-19. Nobody saw that move coming. Even the best and brightest market-timing gurus were blindsided. AMD's shares fell 14% in a week, slashing the peaks off that skyrocketing stock chart.
That drop was followed by the inflation panic and the Russian invasion of Ukraine. Investors backed away from high-flying growth stocks like AMD for several months, and each new body blow was based on economic issues on a global level. The company did its part to support its share prices, exceeding Wall Street's estimates across the board during the meltdown. But that didn't matter. AMD's stock was taken to the cleaners for reasons far outside the company's control.
What about the recent uptick, though? Surely AMD earned that 21% gain the hard way, with positive financial reports and game-changing product releases.
Sorry, but the answer is no. The S&P 500 also rose 8% over the same time span, thanks to a generally positive earnings season and signs of effective results from the government's inflation-fighting efforts. The impressive earnings report on Aug. 2 generated an easy-to-miss squiggle on AMD's chart, lost in the noise of unpredictable economic news:
In reality, stock trading with your finger constantly on the buy and sell buttons is a bad idea. You're likely to buy shares long after the stock-boosting effects of positive news have been priced in. Then, you might sell when the news looks bad, locking in low prices and then staying out of the market for too long. Whatever gains you might achieve this way will be subject to higher taxes, and I'd be impressed if you could actually match the returns of a simple buy-and-hold strategy with these tactics.
All that being said, AMD stock is currently trading at historically low price-to-earnings and price-to-free-cash-flow ratios. The company is making big strides in the data center market and the demand for embedded processors is catching fire. I think it's a smart move to buy AMD shares right now, far below November's all-time highs, and hold on to those stubs for five years or more.
I'm not sure the master investors mentioned earlier would be specifically interested in AMD today, but the likes of Buffett and Lynch would most certainly agree with my long-term approach and the need for patience in turbulent times. You can quote me on that.
