5 Ways to Earn Better Returns

I sold my stocks at the beginning of May, because my wife and I recently purchased our first home. It was bittersweet; I was excited to be a homeowner but sad to see my holdings go. Then I watched in even greater dismay as Whole Foods shot up nearly 14% on earnings.

Yet this market quickly reminded me why I was smart to sell:

• Whole Foods is since down 33%.
• FedEx (NYSE:FDX) is down 15%.
• Home Depot (NYSE:HD) is down 17%.
• NYSE Group (NYSE:NYX) is down 20%.

Volatility, thy name is stocks.

The crazy market
I sold as soon as I knew I would need that money because -- even though I was confident in my long-term holdings -- I had no idea what to expect in the next month. The market is a fickle place, and even the Warren Buffett disciples have said they have no idea what will happen tomorrow.

This is a market that hasn't hesitated to shave billions of dollars of value off great companies with wide moats and stellar operating histories -- companies like those above as well as Boeing (NYSE:BA), Lowe's (NYSE:LOW), and Caterpillar (NYSE:CAT).

That's crazy!

The easy way
But hey, it's an accepted fact that the market is crazy in the short term, and that the market is particularly crazy today with inflation, rising energy costs, and war looming on the economic horizon.

That said, there are two things we know about stocks:

1. They offer the best returns; and
2. While earning those returns, stocks will drop precipitously along the way.

So how can you earn better returns? First, buy companies with superior management and wide market opportunities at good prices. Next, hold those companies for the 10, 20, or even 30 years.

More free advice
I know that two-step plan sounds too good to be true, but it is a recipe for market-beating returns. There will, however, be hiccups along the way. That's why we also advise members of our Motley Fool Stock Advisor investment service to follow these five maxims as well:

1. Broadly diversify.
2. Invest new money on a regular basis.
3. Eliminate emotion from decision-making.
4. Expect mistakes.
5. Scale back any individual position, or your exposure to stocks, if you're fretting over its volatility.

The Foolish bottom line
If you decide to heed these lessons (or join Stock Advisor), you're on your way to better returns. Remember, however, that they work only over long timelines. So don't go investing in stocks if you need money next month to, say, buy a house.

Fool co-founders David and Tom Gardner are beating the S&P 500 by more than 34 percentage points since 2003 with their stock picks in Motley Fool Stock Advisor. Click here to join the service free for 30 days.

This article was originally published on May 15, 2006. It has been updated.

Tim Hanson recently bought back a small position in Whole Foods but owns shares of no other company mentioned. Whole Foods and FedEx are Stock Advisor picks. NYSE Group is a Rule Breakers recommendation. Home Depot is an Inside Value pick. No Fool is too cool fordisclosure.