The number one factor for building wealth for the stock market, is time in the market. The longer your investing horizon, the more you stand to make.
You can be a great investor and earn 15% annual returns and quadruple your money in 10 years. Or you can be an average investor and earn 7% annual returns and quadruple your money in about 21 years. Before you start getting delusions of grandeur, there are only a handful of people that can boast of 15% annual returns over their investing lifetimes. And remember we are approaching the 10th year of a bull market.
Compounded Interest is the most powerful force in the universe
Albert Einstein
It’s not often you find an apt financial quote from a physicist, much less one of the most revered physicists of all time. Time and patience are two sure-fire ways to building wealth. Basic economic principles like the time-value of money and compounding make it so the deck is ever stacked in your favor, as long as you continue to earn interest. The time part is pretty straightforward. The patience part is a little more difficult.
Time is the friend of the wonderful company, the enemy of the mediocre
Warren Buffett
Great companies will do well over time. They will build their brands and grow their earnings. Your main job in owning them is to review their financial statements every year or so and, assuming there are no glaring red flags, stay out of your own way and let them work for you.
Again the important part is identifying the wonderful companies. Companies that have survived and thrived through economic downturns, recessions, and changing business conditions for example. A good place to start is to look for companies that have a proven track record of growing dividends. 20 consecutive years of increases is preferable. Here is a good website that is a good place to start your research. They track and categorize dividend paying companies, including how many years of consecutive raises a company has.
Once you have your wonderful company identified, don’t second guess yourself just because the stock price doesn’t go up right away. Stock price declines should not phase. They give you a chase to accumulate more shares for less money. It’s the same concept as getting a discount at the store. The best part about discount shopping for income stocks is not only to you get more shares for less, you lock in a higher yield as well.
PepsiCo will likely pay close to $4 per share in dividends next year. If you can acquire shares at $100, you are locking in a 4% yield on the cost of your investment. If on the other hand shares go up to $135, you are only looking at a 3% yield.
When you are buying stocks for the long term, the starting price still matters, but it matters a little less. Time is still your friend, but by overpaying when buying, you can knock off the equivalent of a year or two of returns. Not a huge deal when your time frame is 20+ years, as the compounded power of growth of great companies will help you catch up, but why start the race behind?
Part of your research should be to check the historical P/E for the company and the industry. Growth and safety are two very good reasons to have a P/E higher than industry average. It makes sense people would want to pay more for companies with proven track records or that have great future prospects. It’s finding those companies that have those traits and are still trading at a below average P/E that makes a good long-term investor.