Some people will tell you it’s great to buy stocks when the market makes a new high.
Some people will tell you to be cautious when the market makes a new high.
Some people will tell you it’s great to buy stocks when the market hits a new low.
And some people will tell you not to bet against the trend.
For people who trade the market, I’m sure some of these ideas are useful. But if you’re an investor looking to compound your wealth for years (like in your individual retirement account), there’s an unconventional, very profitable and worry-free approach to "the market" and its highs and lows.
This approach means you can stop worrying about the market and start making money.
You can use all sorts of indicators to try to forecast market movements. But in the end, no one actually knows where the market will go.
If you’re looking to put serious money to work over the long term, you’re much better off trying to find cash-gushing businesses with big competitive advantages and rock-solid balance sheets, run by managements that know how to allocate capital effectively.
If you can find one that consistently pays out a little in dividends and reinvests most of its cash flow at high rates of return for many years, you can build a fortune no matter what the market does.
For at least 95 percent of the investors out there, this approach delivers much greater profits — and much less stress. And it works in any market.
For example, in early 2009, I urged readers to buy shares of Intel (INTC.) At the time, I pointed out that Intel was the "World Dominator" of semiconductors. I pointed out how Intel consistently generated high returns on equity, consistently raised its dividend and sported an incredibly strong balance sheet.
At the time, the market was in turbulence. Everything in America was up for sale at "panic liquidation" prices. Investors were scared. Most were bearish on stocks and expected shares to continue to decline. But what "the market" was doing wasn’t a concern. We were concerned about buying a great business for a good price. Valued as a World Dominator, at 25 to 30 times earnings, Intel was worth $23 to $28 per share in 2009. But when we bought, it was trading for less than $16 per share.
We’re up 70 percent on the stock, and we are earning 5.9 percent in dividends on our original purchase price. We own one of the world’s best businesses, and we’ll probably never sell the stock.
Now consider another recommendation, Johnson & Johnson.
Johnson & Johnson (JNJ) is the World Dominator of consumer products, like toothpaste, headache pills, mouthwash and bandages. Like Intel, it consistently generates high returns on equity, consistently raises its dividends and sports an incredibly strong balance sheet.
When we bought Johnson & Johnson, the broad market was near a yearly high and up 70 percent from its 2009 low. But I couldn’t have cared less about those numbers. I was just looking to buy a world-class business for a good price. At the time, we could buy Johnson & Johnson for less than 10 times free cash flow.
We’re up 60 percent so far, and we are earning 4.3 percent in dividends on our original purchase price. We own one of the world’s best businesses, and we’ll probably never sell the stock.
What we all want is an investment that increases in value every year, regardless of the stock market’s action. If you had that, you could invest money regularly, perhaps each month, confident the value of your investment would grow enough to outpace inflation and keep your money safe from loss.
With that kind of confidence, a person with a regular income can sock away a little money every year, no matter what the economy or the market is doing.
Fortunately, there’s a simple, easy-to-understand secret that unravels the mystery of investing and removes the headaches created by the market’s ups and downs. It comes down to buying great businesses for good prices.
Once a long-term investor realizes how futile it is to try to predict the stock market’s direction and resolves to simply buy and hold great businesses for the long term, that investor takes a major step forward.
Those businesses are called World Dominators in my book. They grow their value (and often their dividend payments) every year. And when you buy them at the right price, it doesn’t matter what the stock market does from month to month.
It only matters that you hold the business and let it build wealth for you, worry-free.
— Dan Ferris
This article originally appeared on Wednesday, July 24 at DailyWealth.com.