If the purpose of investing is to grow your wealth over time, you should prioritize the type of investment that gives you the best return, right?
Among the various types of investments, the stock market is the place to invest to get the best returns.
When you learn Rule #1 investing, you can achieve average annual returns upwards of 15%. Rule #1 investing is a stock market investing strategy focused on buying wonderful companies on sale.
A wonderful company is one that will continue to grow as the years go by, surviving whatever challenges the market may throw at them along the way. If you are able to find these companies to invest in, you can certainly get the best returns on your investments.
You don’t just have to invest in singular stocks, though. Putting some of your money into a stock market index fund is also a good practice.
If you are more risk-averse, or only ready to dip your toe into the stock market at this point, that’s OK too, but keep in mind nothing will grow your money quite like investing in the stock market can.
What’s the Best Way to Invest Money?
Clearly, the best way to ensure good, if not great, returns on your money is to learn to invest (on your own!) the Rule #1 way and put your money into wonderful companies in the stock market.
You may be wondering, “but, Phil, what about those other types of investments? Shouldn’t I put some of my money in those too?” and I get why you’re asking this.
There’s a lot of talk in the financial community about “diversification”, which simply means investing your money in a variety of ways in order to provide a safety net should one investment go South.
The thing is, you don’t need to diversify if you know how to invest and understand what you are investing in.
By taking the time to research and learn about the companies you are investing in, you are providing your own safety net, because you won’t invest in any company that doesn’t meet the standards for a wonderful company, as we define it in Rule #1 Investing.
That is key.
Of the investment options available, investing in the stock market is the option that offers the most potential for reward, but, you can’t blindly put your money in stocks chosen at random and expect to achieve great returns.
In order to succeed investing in the stock market, you have to use a system and a strategy.
How To Invest Money in Stocks
The system and strategy I recommend is Rule #1 investing. This is how to invest in stocks the right way.
Rule #1 investing is a process for finding wonderful companies to invest in at a price that makes them attractive.
I’ve thrown around the phrase “wonderful company” quite a bit already, and if you’re familiar with Rule #1 Investing you know what I’m talking about, but here’s a quick refresher:
A wonderful company is one that has trustworthy management, a track record of growth, a leg up on the competition, and that you understand.
Here’s a brief overview here of the four characteristics that every company has to have in order to be considered “wonderful”:
One important factor to consider when analyzing the investment potential of a company is its management.
Companies live and die by the people who are running them, and you need to make sure that any company you invest in is managed by executives who are honest, talented, and determined.
Before you invest in a company, take the time to thoroughly familiarize yourself with its management, and make sure that you trust them to grow the company going forward.
If you are going to invest in a company, it needs to have some sort of personal meaning to you.
There are a couple of reasons why this is important. For one, you are more likely to understand companies that have meaning to you. In other words, you know what the company does, how it works, and how it makes money.
Understanding a company means that you will be better able to analyze the future of the company and make more accurate decisions when investing in it.
Investing in a company that has meaning to you and that you believe in also makes you more likely to research the company and stay on top of what is happening with it – which, in the end, is a big part of being a successful investor.
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When a company has a moat, it means that it is difficult for competitors to come in and carve away a portion of that company’s market share, protecting it from being outrun by competition.
A moat could be a proprietary product or software, an impenetrable brand, customer loyalty, or majority control over the market.
Margin of Safety
The Margin of Safety is a measure of how “on sale” a company’s stock price is compared to the true value of the company.
You need to be able to determine the value of a company and from that value determine a “buy price”. The difference between the two is the margin of safety. The goal is to find wonderful companies for 50% off their actual value. This allows you to purchase a company when it is undervalued at a price that all but guarantees a great return on your investment.