Spending time looking over the habits, histories, and portfolios of many very successful investors, I’ve learned something fascinating.
Many very successful and wealthy investors approach investing in a very systematic and simple manner.
They’re not looking to jump on the next big trend as early as possible to see if it pans out.
They instead see the value in established high-quality products and services that allow people to carry out their everyday lives. And they see value in letting the winners and losers flesh themselves out, even if this takes a long time, reducing risk.
There is still a lot of money to be made by seeing investing in this way.
This logic is, perhaps, counterintuitive to the average person, who might think that the way you make money with stocks is to spot the next “big thing” before anyone else.
Well, that’s not necessary. At all. Not only that, but you’re taking big risks by swinging for the fences like that.
Intelligent investors instead look for high-quality companies (with established track records) that are trading at appealing valuations for the long haul. They look for the intersection of maximum return and minimum risk.
And as a dividend growth investor, I take that methodical approach and customize it for my own needs: I also look for a lengthy streak of growing dividends, with the knowledge that enough growing dividend income can fund my entire lifestyle (without having to sell the stocks I spent years buying), rendering me financially free.
Indeed, my FIRE Fund, which has been built using this systematic and simple approach just laid out, generates the five-figure and growing passive dividend income I need to pay for my bills, which allows me to go about my life without needing a job.
I’m going to build my case using a specific example to show you how you don’t need to spot the next amazing trend before anyone else in order to be a successful investor over the long term.
While the smartphone might be ubiquitious today, acting almost as an extra appendage for people, it wasn’t so not that long ago.
I remember getting my first cell phone at 17 years old, and I thought it was just awesome.
However, that phone was incredibly basic compared to what people are rocking these days. I could make wireless phone calls while out and about. That was pretty much the extent of things.
But consumers were (and still are) obviously hungry for much more, and technology was (and still is) rapidly rising to the occasion.
Did you need to spot this trend way back in the beginning in order to become a successful investor?
Let’s take the iPhone, for example. It’s the world’s best-selling smartphone. It’s one of the world’s most successful consumer products of all time.
If you think you needed to jump on this thing as soon as Steve Jobs publicly introduced the product back in 2007, you’d be wrong.
(Yes, you could have made more money by getting in back then, but you can still make plenty of money by getting in long after the early days of what will eventually become a very profitable product or service. Hindsight is always 20/20. This information is designed to show you that it’s practically never too late to invest in a high-quality company.)
Warren Buffett is, as far as I know, the world’s most successful investor. He’s definitely the wealthiest. As someone who’s routinely crushed the market for years on end, numerous industries have popped up solely dedicated to studying his work.
Did he jump on the iPhone in 2009?
Berkshire Hathaway, Inc. (BRK.B) started accumulating shares in Apple Inc. (AAPL), through the common stock portfolio Buffett oversees, in 2016 – a full nine years after Jobs first announced the product. I even discussed this purchase, reminding everyone that Buffett admitted that it wasn’t even his idea to buy the stock.
Apple’s stock was languishing in the $90s back in Q1 of 2016, when Berkshire first started accumulating its shares.
At some point after initiating the position, Buffett, and Buffett’s business partner Charlie Munger, started seeing Apple as a very appealing business, and they decided it was a smart move to more heavily invest in this company. This meant Buffett would have to personally add his weight to it, as he still controls the majority of their portfolio’s capital.
Well, Berkshire has been aggressively adding ever since, buying up an extra 74 million shares of AAPL as recently as Q1 2018 – at prices much higher than when it first started building that position.
Berkshire’s position in Apple is now worth ~$50 billion. It’s far and away the largest single position in Berkshire’s common stock portfolio, accounting for almost a full 25% of the value of their portfolio.
Berkshire Hathaway built up this massive position in Apple years after their flagship product was first introduced.
And they’ll reap the rewards of that wise decision for many years to come.
I wasn’t even an investor back in 2007. I was flat broke until I started buying my first stocks in 2010. So buying Apple stock wasn’t on my radar back when the iPhone was initially shown to the world.
However, I had many opportunities to buy Apple stock once I did become an investor. It’s just that the stock didn’t suit me, for Apple didn’t start paying a regular, reliable, and growing dividend until 2012.
I gave them a few years to build up that track record, then I initiated a position in Apple in early 2015 for ~127/share. I last averaged down on the stock in early 2016 for a bit over $102/share.
While I got in before Buffett and Berkshire, I still bought into this company, business model, and trend many years after it was already quite obvious to the world that something special was here.
Yet it’s still a very successful investment for me, no matter how you were to slice it – dividend growth, aggregate dividend income, total return, business performance, etc.
You Don’t Have A Time Machine
Here’s what Warren didn’t do when it came to investing in Apple: Buffett didn’t sit around, wishing he had a time machine so that he could go back in time and buy Apple stock years prior when it was much cheaper.
A stoic and successful investor sees the world as it is, not as he wishes it would or could be. You have to look at the available options in front of you and weigh out the facts, in the current moment, and make the best decision you can make at that time.
This logic can be extrapolated to just about every other trend out there.
Using another tech company, although operating in a very different way, Microsoft Corporation (MSFT) was already a very well-known business in the late 80s. Computing was a huge trend back when Microsoft was a young pup, and cloud computing is all the rage now that Microsoft is a giant company sporting a market cap of over $800 billion.
But those articles that go on about “If You Had Invested In Company X 25 Years Ago…” are exercises in futility. I was four years old when Microsoft went public in 1986, so this information does nothing for me.
I didn’t buy stock in Microsoft until the spring of 2015, for a bit over $40/share.
So we’re talking almost 30 years after the company went public, with its trends already fully known by the entire world. This wasn’t something I was “spotting” before anyone else.
Yet the investment has gone on to almost triple for me. More importantly, Microsoft is operating at a high level, increasing its profit, and paying me the growing dividends I need to live my life.
Did I wish I had a time machine back in 2015, when I first bought Microsoft?
Not at all. I don’t care about what the stock was doing in the 1980s. It has no relevance on my life today, nor does it in any way impact my decision to buy (or not buy) the stock.
Future Investors Are Being Born Every Second
Knowing that you don’t need to spot the next big thing is further cemented by realizing that future investors are being born every second.
There are six-month-old babies pooping themselves right now, and some of these babies are going to grow up one day to make great investment decisions and grow their wealth.
They won’t have the opportunity to go back in time to get into what you’re looking at right now, nor will they need to spot something before anyone else. Indeed, many of them will (perhaps foolishly) wish they could go back to 2015 or so and buy Apple for ~100/share, so keep that perspective in mind.
However, these future investors simply need to approach investing intelligently and pragmatically, with a long-term time horizon.
Furthermore, many trends that are present today will almost certainly be present when they’re old enough to buy stocks.
In fact, having the mindset built in where you don’t spot trends is probably more valuable, in the long run, than one where you’re constantly trying to spot the next trends (swinging for fences, taking risk, and possibly losing a lot of money in the process).
Take alcohol, for example.
It’s not exactly a hot trend, but people have been consuming alcohol for a long time now. And it’s very likely more people will be consuming more alcohol, at higher prices, 10, 20, and 30 years from now.
I didn’t buy into Diageo PLC (DEO) until 2015 – centuries after this “hot trend” cooled off.
Yet the investment has been very solid for me, and there’s no reason to believe an investor in 2050 won’t have an opportunity to get into this non-trend and make a lot of money, too.
Companies aren’t going anywhere. Stocks aren’t going anywhere. Trends aren’t going anywhere. There’s no need to jump in before you know if there’s a shark lurking in that water. Take your time. Be patient. Let things play out a little bit.
Hot trends come and go.
But high-quality products and services that the world craves usually stick around for a long time, giving you ample opportunity to get in – even long after it’s become apparent to the entire world that the investment makes sense.
You don’t need to spot a trend before anyone else to make money and become a great investor. In fact, trying to go out of your way to do that might end up hurting you more than helping you.
Great companies are all around us. And there will be great companies to invest in decades from now. There’s no rush. Stick to your plan. Stocks aren’t going anywhere.
Full disclosure: I’m long all aforementioned stocks.
What do you think? Is it necessary to spot a hot trend before anyone else? Have you made plenty of money by investing in a company long after its trend cooled off?
Thanks for reading.
Image courtesy of: lekkyjustdoit at FreeDigitalPhotos.net.
P.S. If you’re interested in financial freedom, which certainly doesn’t require spotting hot trends, check out some fantastic resources that I personally used on my way to becoming financially free at 33!