There are a few habits that separate good investors from everybody else. We asked three of our analysts to explain one thing you can do immediately that can make you a better investor, and here is what they had to say.
George Budwell: Given that every major U.S. stock market index has moved higher during the long term, you might think that making money on stocks is a relatively straightforward affair. Yet, studies on the matter have repeatedly shown that the average retail investor loses money -- roughly 2% to 3% per year. The underlying culprit behind this widespread failure appears to be individuals deciding to actively manage their portfolios, leading them to sell low and buy high. Put simply, they let emotions guide their investing decisions, resulting in costly mistakes.
The good news is that there is an extremely simple and time-tested solution to this fundamental problem -- namely, dollar-cost averaging. In a nutshell, dollar-cost averaging is investing a fixed amount of money on a set schedule, such as monthly or quarterly. The benefit is that your average cost tends to come down over time, and it greatly reduces the risk of buying "high", so to speak.
As long as you have chosen a seaworthy investing vehicle like Johnson & Johnson(NYSE:JNJ), for instance, the best plan of action is to invest at regular intervals and ignore the daily price fluctuations. To illustrate my point, I ran a backtest over a 30-year period on J&J stock employing a dollar-cost averaging strategy. The result was a whopping 7,511% gain!
Remember, the historical trend is up; so stay invested for the long haul and let time do the heavy lifting for you.
Matt Frankel: One of the best things you can do to make yourself a better investor is to change the type of stocks you're looking at. Specifically, I'm talking about shifting the majority of your attention away from the "it" stocks like Tesla, Amazon.com, and others like them, and toward stable, dividend-paying stocks with solid growth histories.
Sure, over the short term, this strategy might not be quite as exciting as trying to chase the "next big thing," but over the long run, these stocks can produce incredible returns while still letting you sleep at night.
Consider the companies Procter & Gamble, Johnson & Johnson, and Realty Income Corporation. While these stocks are often regarded as "boring," especially by younger investors, during the past 20 years they have averaged total returns of 11.3%, 13.3%, and 17.3% respectively.
In other words, a $10,000 investment 20 years ago in each of these three companies would now be worth $86,700, $122,000, and $243,000, all handily beating the final value of $65,000 an investment in the S&P 500 index would have produced.
When picking stocks, keep your sights set on long-term growth and safety, and great returns will follow.
Leo Sun: Novice investors often confuse short-term trading strategies with long-term investing ones. The difference between a short-term trader and a long-term investor is that the former tries to time the market, but the latter does not. This means that true long-term investors never buy a stock expecting it to bounce right back up. Rather, they view dips as buying opportunities to lower their average purchase price. By comparison, short-term traders will simply sell the position, take the loss, and try to jump to the next rising stock.
Therefore, ignore short-sighted articles about moving averages, resistance, support, and trading volume. Instead, focus on the heart of the company: revenue and earnings growth, free cash flow, return on equity, and margins. Compare these percentages over time. Do a proper SWOT -- strengths, weaknesses, opportunities, and threats -- analysis of the company. This type of analysis is much more useful than trying to spot patterns and trends in charts.
When deciding on the ideal price to buy, look at historical P/E and P/S ratios. Low ratios point to value stocks, while higher ratios mean that investors are expecting more growth. Using these tools effectively can help anyone become become a more disciplined long-term investor.
George Budwell owns shares of Johnson & Johnson. Leo Sun has no position in any stocks mentioned. Matthew Frankel owns shares of Realty Income. The Motley Fool recommends Amazon.com, Johnson & Johnson, Procter & Gamble, and Tesla Motors. The Motley Fool owns shares of Amazon.com, Johnson & Johnson, and Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.