Wealth Creation Through the One Rule You\\\'ll Ever Need
Create wealth using the one rule that trumps all other investing advice. Want a hint? Warren Buffet uses this rule to make billions.
Late at night, throughout the bars of Wall Street, the professionals must argue long as to what is the one best investing rule to further their careers and riches. Is it 'use hedge funds'? Or is it 'diversify'? How about 'be patient'? No, no, surely it's 'buy low, sell high'!
Do you have a favorite? Have you retired on yours yet?
While I counsel all investors to diversify, be patient, and buy low and sell high, none of these are exactly the one rule. Heaven knows that chasing the fad of the day – hedge funds – isn't the one rule either.
The one rule used by Warren Buffet and scores of other billionaire investors is to invest based on fundamental stock values such that you are, in effect, certain of buying at a low price. In fact, not only a low price, but at a discount to the real value of the stock.
Buying stocks at a discount based on their fundamental values is called value investing. It's Warren Buffet's style and it can be yours too. The theory and approach were first defined in a seminal book written in 1934 by Ben Graham and David Dodd called 'Security Analysis'. This book is the bible of this wealth creation method.
Value investing finds stocks in public companies that trade at discounts. The discounts can be to one or more of several tangible, accounting-oriented measures: to book value or tangible book value, have high dividend yields, have low price-to-earning multiples or have low price-to-book ratios.
This style of investing requires careful research and discipline to implement, but is one of the highest returning and safest methods around, because when you do buy, you're buying at 80 cents on the dollar, or even 50 cents. Then you just wait for the rest of the stock market to recognize that the company is under priced and they drive the stock price up.
Now I don't recommend that you buy the Graham & Dodd book, get a Masters in Finance, and screen thousands of stocks yourself.
There's an easier way. Select a couple great mutual funds that practice value investing. There are quite a few out there. While you're at it, make sure you select one with low costs and good track record. Then you'll have a room full of professionals at this fund scouring the earth for their next value investing home run.
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