Value investors may find that they naturally develop a more complex strategy as they gain more experience in investing in the stock market. For example, they may consider a larger amount of data before buying a stock than they did when they first started investing.
Therefore, there is a danger that they gradually begin to overlook their basic principles that were a key reason for past success. This may be detrimental to their future returns.
One investor who has continually maintained a laser focus on getting the basics right is Peter Lynch. His strategy of buying unpopular stocks and holding them for the long run could be a key reason for his long-term outperformance of the stock market.
Investing in unpopular stocks
Buying stocks while they are unpopular among other investors is a simple but effective strategy. Unpopular stocks usually offer wide margins of safety that push the investment odds further into an investor’s favor.
At the moment, there are many opportunities to buy unpopular stocks. For instance, investor demand for companies operating in sectors that have been hurt by containment measures is low. This may lead to opportunities to buy dominant businesses with large market shares within industries such as resources and retail while they offer good value for money.
There are risks in buying unpopular stocks, in terms of their short-term prospects being challenging. However, buying an asset at a discount to its inherent value can produce high returns as investor confidence recovers.
Lynch has a track record of buying companies when his peers are disinterested in them: “Invest in simple companies that appear dull, mundane, out of favor, and haven’t caught the fancy of Wall Street.”
A buy-and-hold strategy
A basic buy-and-hold investing strategy may offer higher returns than a plan that aims to time the stock market.
The S&P 500 has experienced 26 bear markets since 1928, yet it has delivered compounded annual returns of around 10% in the same time period. An investor trying to time the market may have been able to generate a higher rate of return. However, the S&P 500’s recent crash and subsequent rebound suggests that accurately predicting the stock market’s movements is impossible due to the infinite number of variables that can affect it.
Lynch previously highlighted his lack of interest in trying to time the market. Instead, he has bought and held stocks over the long term: “The lesson here is: don’t spend a lot of time poring over the past performance charts. That’s not to say you shouldn’t pick a fund with a good long-term record. But it’s better to stick with a steady and consistent performer than to move in and out of funds, trying to catch the waves.”
Focusing on businesses
At its core, investing is centered on buying part of a sound business that has the potential to gain value over the long run. Therefore, spending a large proportion of your time analyzing businesses and their future prospects could be an efficient use of your time.
This simple approach could be particularly beneficial at the moment. The economy’s weak outlook means that some companies in industries with uncertain futures may struggle to survive. Investors who make sure that their holdings have solid fundamentals, such as a wide economic moat and low leverage, may be able to position their portfolios more effectively to make gains over the long run.
As Lynch once stated, “Although it’s easy to forget sometimes, a share of stock is not a lottery ticket. It’s part ownership of a business.”
Read more here:
- Seth Klarman on Looking Beyond the Short Term
- Is Benjamin Graham's Advice on Value Investing Still Useful?
- Charlie Munger on Improving Your Investing Ability
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