If you only scrolled social media or paid attention to Wall Street and investing experts, you'd think investing was akin to rocket science.
Actually, investing can (and should) be simple when you remove a lot of the noise. Warren Buffett is one of the most successful investors in history, and what's so fascinating about his success is just how relatively simple and boring his strategies and philosophies are.
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Value investing isn't sexy, but it works
Buffett may very well be the poster child for value investing, a strategy where investors look for stocks trading below their true worth, or intrinsic value. Buffett and Berkshire Hathaway's (BRK.B -0.68%) initial investment in Coca-Cola (KO 1.50%) is a prime example of this philosophy.
Coca-Cola was hit hard during the Black Monday stock market crash in October 1987. Although nothing fundamentally changed with its business, Coca-Cola's stock was trading at deeply discounted prices, and Buffett saw this as an opportunity, buying more than 23 million shares between 1988 and 1989.
Since the beginning of 1988, Coca-Cola's total return has been more than 5,800%. That's $58,000 for every $1,000 invested.
Data source: YCharts
Being a good value investor means researching companies to get a good idea of their intrinsic value. Otherwise, you wouldn't know a stock's true value because price alone only tells you so much. This process can be boring for most people, but the benefits can pay off.
To gain from undervalued stocks, you only need the market to eventually price the stock according to its intrinsic value to make money. This gives you a margin of safety. Conversely, investors focusing on growth stocks need them to grow at much higher rates because they're often priced at a premium.
Profitability still matters
Many unprofitable companies are losing billions of dollars per year in the name of future growth. In defense of some: They're playing the long game, and this is the right move. But for many, there's no true path to a profitable future anytime soon -- if ever. Buffett prefers cash-cow companies with strong fundamentals and competitive advantages.
One advantage of investing in boring businesses with strong balance sheets is they often pay dividends. The majority of younger, fast-growing companies need to reinvest all their profits to continue growing, so the only way investors benefit is from a rise in stock price. Investors in dividend-paying companies make money regardless of how the company's stock price moves. (Too be sure, it's worth noting that Buffett's company, Berkshire Hathaway, doesn't pay a dividend.)
You can't predict how a company's stock will perform, but you can be all but certain that if you're investing in solid companies with no shortage of cash on hand, your dividend will come quarterly as expected.
Dividends, especially when reinvested, can account for a large portion of investors' returns because of the magic of compound returns. If you invested $10,000 in the S&P 500 index in 1960, it would've been worth more than $641,000 at the end of 2022 based on price appreciation only. That $10,000 would've been worth more than $4.05 million with reinvested dividends.
The focus is usually on stock prices, but dividends play an underrated role. From 1960 to 2022, reinvested dividends accounted for 69% of the S&P 500's total return. Just because a company's shares aren't rising at a 20%-plus rate annually doesn't mean it isn't a lucrative investment.
Help with the temptation of timing the market
It can be exciting and very rewarding financially when you time a trade right, but the harsh reality is that consistently timing the stock market correctly is virtually impossible over the long term. I can't do it, Wall Street can't do it, Buffett can't do it, and unfortunately, you won't be able to do it either. I'd be lying if I said it wasn't tempting to try, though.
One of the ways you can fight the temptation is by using dollar-cost averaging. When you dollar-cost average, you put yourself on a set investing schedule and make your investments regardless of stock prices or how you think stocks may move. It's essentially how 401(k) plans work.
For instance, you could decide to invest $500 every other Friday. When those Fridays come around, it's your job to invest $500 no matter what. It doesn't even matter if you think prices are about to drop the following Monday; the goal is to remove any attempts to time the market.
Buffett put it simply: "If you like spending six to eight hours per week working on investments, do it. If you don't, then dollar-cost average into index funds." And always remember that time in the market is more important than timing the market.
