"Unfortunately, most aspiring traders find out far too late that the act of trading is 20% intellectual and 80% psychological," says Michael Martin in The Inner Voice of Trading. For this very reason, it's crucial that every individual investor finds a system that is compatible with his or her psychological makeup. Of all the investment advice out there, here are two particularly Foolish philosophies for long-term investors.
|Gurus||Warren Buffett, Charlie Munger|
|Buffett investment advice||"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price."|
|Philosophy||Buy wonderful companies at reasonable prices.|
An investment that could fit this investing style well is Google (NASDAQ:GOOGL). Google is clearly the world's leader in online search, with more than 60% market share (no other competitor has more than 10% market share). While traffic acquisition costs are on the rise as the company transitions to a more competitive mobile environment (7.9% of revenues in Google's first-quarter results compared to 6.4% in the year-ago quarter), secular growth trends in digital advertising should continue to drive EPS growth. At 26 times earnings, the company is reasonably priced.Famed value investors Warren Buffett and Charlie Munger believe the best way to identify this value is to look for excellent businesses trading at reasonable prices and buy them with the intention of holding them over the long haul.The term "value investing" is often used in different ways, suffocating its meaning. But it's actually really simple. Charlie Munger, in his typical bluntness, sums it up best: "All intelligent investing is value investing -- acquiring more than you are paying for." Investment advice doesn't get any plainer than that.
|Gurus||Philip Fisher, Thomas Rowe Price|
|Fisher investment advice||"The company that doesn't pioneer, doesn't take chances, and merely goes along with the crowd is liable to prove a rather mediocre investment in this highly competitive age."|
|Philosophy||Buy phenomenal businesses driven by excellent growth stories without quibbling over price.|
What kind of crazy investment advice tells you to ignore price? This kind.
The premise goes like this: Growth investments face such incredible growth opportunities that considering valuation metrics will do more harm than good, because many of these industry disrupters will never trade at sensible valuations.
Growth investors aren't looking for good investments, they look for outstanding businesses. As Fisher said, "I don't want a lot of good investments; I want a few outstanding ones."
Today, Netflix (NASDAQ:NFLX) embodies a typical growth investment. Though the stock was rocked in 2011 in the wake of its Qwikster episode that left customers confused, it's back to growth again now for Netflix shareholders. Year to date, the stock is up a whopping 148%.
However, investors who try to value Netflix by traditional metrics will be shocked at the seemingly ludicrous valuations they will discover. Valuation metrics simply don't work for companies like these. Instead, it's best to add context by analyzing these companies' market opportunities. Fool contributor Tim Beyers breaks down the approach, using Netflix as an example, in this video.
What's your style?
There are obviously more approaches to investing than these two. However, these investing gurus offer solid investment advice for long-term investors.
Some investors need ratios to soothe their conscience. Others need massive market opportunities. Still others can manage to be very flexible with their investment style, able to jump from one approach to another.
Whatever your approach may be, it's important that you understand yourself and your style. Can you identify with either of these approaches? What's your style?