Strategy For Stock Investing — A Look At What Works

Let's take you through the essence of the strategy for stock investing that we've found works for us. Our strategy has been culled from the investment advice of brilliantly successful investors like Warren Buffett, Peter Lynch, and Ben Graham, among others.

Our Strategy for Stock Investing

In a nutshell, what we do is find great companies and wait patiently till their stock sells at attractive prices. Then we buy meaningful amounts of stock in these companies. We wait patiently till their stock price moves to levels we consider overpriced and then we sell (we also sell based on other considerations covered below).

This stock investing strategy sounds really simple .... and it is. However, it takes a lot of hard work and emotional discipline to execute. So don't let the simplicity lull you into thinking that this is an easy way to make money.

Let's clarify this strategy a little more.

What do We Mean by Great Companies?

We're looking for companies with durable competitive advantages. There are some companies that manage to be virtual monopolies in their area. These companies have, over the years, succeeded in building a "moat" around them to keep their competitors away.

Warren Buffett calls these "companies with an economic moat".

What do We Mean by Attractive Prices?

We have found that if we buy stocks of great companies when they are trading at discounts to what we thing they are worth, that added margin of safety increases the probability of a decent return on our investment.

How do we figure out how much a stock is worth? Here are a couple of stock valuation models we use.

What do We Mean by Meaningful Amounts of Stock?

Companies that meet our criteria above are not easy to come by. Sure, there are plenty of great companies with wide economic moats, but to find them at good prices requires a lot of patience.

So it makes sense to invest significant amounts once we find a company that meets our requirements.

Also, we're not big fans of mindless diversification. We aim for what we call efficient diversification — an optimal level of diversity in our stock portfolio.

When do we Sell?

Knowing when to sell is a critical element of any stock investing strategy. The main reasons for us to sell stock would be if the stock becomes overpriced, the fundamentals deteriorate, the reasons we bought the stock in the first place don't hold good anymore, or a better opportunity comes along.

Our discussion on buy and hold sheds more light on this.

To wrap up, our strategy for stock investing involves actively looking for stock investing opportunities that meet our criteria of economic moats and attractive pricing. Such opportunities are few and far in between, so patience is a necessary attribute of our strategy. We try to stay efficiently diversified, and finally, we carefully evaluate when to sell.

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