1. You can create wealth only by adding value to resources or by providing a service of value.
2. Only investments in active businesses are capable of adding value.
3. Owning a business, though very rewarding, is expensive and risky; butowning shares in a variety of successful businesses eliminates most of the risk while retaining most of the reward.
4. Buying the stock of quality growth companies and holding it for the long term provides substantial, predictable returns.
5. Short term trading (BFS/STS) is unpredictable and stacks the odds against you, because it relies upon winning at some loser's expense and because there's no assurance that you won't be the loser.
6. The benefits of long-term investing include carefree portfolio maintenance, the potential to double your money every five years, the deferment of taxes, and the fact that there are rarely any losers.
Let's review the simple mathematics that makes this method work:
1. Assume that 15 times earnings is a fair multiple for a good company and that the company earned a dollar per share last year.
2. You will therefore pay $15 for the stock.
3. In five years, the earnings will have grown to $2 per share.
4. At 15 times earnings, the price will then be $30.
The value of your investment will have doubled - in five years!
Hopefully you're satisfied with the logic behind this investing approach and can see its advantages.
Let's dispel any doubts you might have about whether you can be successful.
The best way to minimize the risk is to invest in good quality companies for the long-term, expecting not to make a killing but to earn as much as good quality companies are capable of earning for their shareholders.
How many of these stocks do you need in your portfolio?
Over-diversification will lead to attenuation of your potential gains in your portfolio.