Investing in the stock market can be intimidating, and it's tough to know whether you're making the right moves. It often takes decades to see significant results, and even small mistakes could cost you thousands of dollars.
Making it even more challenging is the fact that there's no single correct way to invest. Everyone will have slightly different timelines and tolerance for risk, so the ideal portfolio for you may differ from that of your peers.
However, there is one key to investing success that applies to everyone regardless of investing preferences, and it's one that billionaire investor Warren Buffett uses himself: be a business picker.
Image source: The Motley Fool.
Choose businesses, not stocks
When it comes to building a lucrative investment portfolio, most people focus on choosing the best stocks. However, the real secret to success is picking the right companies behind those stocks.
In Berkshire Hathaway's 2021 letter to shareholders, Warren Buffett explains that investing in quality companies is the key to his and business partner Charlie Munger's success when it comes to the stock market.
"[W]e own stocks based upon our expectations about their long-term business performance and not because we view them as vehicles for timely market moves," he notes. "That point is crucial: Charlie and I are not stock-pickers; we are business-pickers."
Why businesses will make or break your portfolio
Of course, quality stocks are still important. But the overall health of the businesses behind those stocks will determine how well your investments perform over time.
The best stocks are the ones from companies with solid underlying fundamentals. This includes everything from healthy finances to a strong competitive advantage to a competent leadership team that can guide the company through tough economic times.
Even shaky stocks can thrive in the short term, especially when the market is strong. But those stocks will often suffer during periods of volatility, and it's far less likely they'll see consistent growth over the long haul.
However, strong businesses have a much better chance of achieving reliable long-term growth. While they'll still often experience hiccups and short-term slumps, healthy companies have what it takes to rebound from these downturns.
Start building wealth in the stock market
Choosing the right stocks is only half the battle. It's equally important to hold those stocks for as long as you can.
Generating wealth in the stock market takes time, and healthy investments are more likely to see slow but steady growth rather than explosive gains. When you invest, then, aim to keep your money in the market for at least 5 to 10 years, or even several decades.
The longer you stay invested, the more you can potentially earn. If you invest, say, $100 per month while earning an 11% average annual return (which is just slightly higher than the market's historic average), that would amount to nearly $240,000 after 30 years.
Investing in the stock market isn't always easy, but with the right strategy, it can be lucrative. By opting for quality businesses with solid fundamentals and then holding those stocks for as long as you can, you'll be on your way to building long-term wealth.
