With the market getting increasingly volatile, it’s important to revisit your long-term investing strategy to make sure that you don’t waver.
If you look back in time you’ll see that nearly every market correction in history represented a buying opportunity for long-term investors. That’s certainly been the case over the past four years.
Obviously your perspective is different if you’re not in the market for the long term. But I’ll leave that subject alone since I’m in it for the long haul, so that’s the platform I’m speaking from.
Let’s get back to strategy though and leave speculation about corrections alone for now. As I’ve said many times before, the secret to making money in the stock market is not to simply invest in great companies. It’s to make great investments based on positive catalysts.
I tend to talk about catalyst investing in the context of individual stocks. But the same strategy can be applied equally well to ETF and mutual fund investing.
In any event, the trick – broadly speaking – is to make sure there are very specific positive trends that you expect to drive shares of the investment higher. This may sound basic, but implementation of the strategy over the long term is anything but.
There are thousands of great companies in the world. Many have cutting-edge products, earnings growth, top-notch customer service and very talented managers. And it’s tempting to buy shares of these “great” companies, but they don’t necessarily deliver big returns to shareholders.
Consider John Deere (NYSE: DE) and Wal-Mart (NYSE: WMT) as two examples. Both are dominant in their respective industries. But over the past five years, these two stocks have underperformed the S&P 500.
So what gives? How do you generate wealth in the stock market if “great” companies – like Deere and Wal-Mart – don’t always deliver above-average returns?
The secret is to recognize the difference between great companies and great investments. Great investments go up in value. And almost all great investments share one thing in common: positive catalysts.
A stock catalyst is an event that has a very dramatic impact on the company’s future. A catalyst can completely change a company’s growth profile and drive the share price higher.
If you’re investing in individual stocks, then you want to look for potential catalysts specific to that company. Industry growth trends are good to monitor, but you want to make sure you understand exactly how the company’s revenue and EPS growth will benefit from the broad trends.
If you’re investing in mutual funds and ETFs, you’re looking for the broad catalysts. In this case, catalysts such as industry growth and country growth are likely specific enough. Just be sure to understand the connection between the trend and the investment, plus how long you believe the trend will last and what you expect reasonable upside is.
But the bottom line is that behind almost every stock outperforming the market there is at least one positive catalyst.
I always stress that one key to a catalyst-based investment strategy is to make sure an event is significant and positive. It should also have a measurable impact on the company in terms of important metrics – such as sales, earnings, product distribution and market share.
You’re also likely to have more success if you focus on a few types of catalysts to begin with. Over time, broaden your criteria.
If you can’t link the catalyst to these types of metrics, they are likely just normal events, and are too small to justify an investment in the company.
Cheap Oil Here to Stay – For Now
Crude hasn’t been this cheap since March 11, 2009. And it’s likely to stay low for a while. OPEC refuses to cut production. And US production is expected to increase – not decrease – an additional 600,000 more barrels a day. The Saudis have played this one wrong – and you could profit from their blunder.
Top analyst Tyler Laundon’s found what he considers the best way to play this new, cheap oil boom.