Worldwide Success

In order to be a successful investor you must follow certain principles that have proven to be effective for other investors.  The Davis family is one of the most successful investment stories in American history, having accumulated a fortune of more than $2 billion over a period of 50 years.  Here are the principles used by the Davis family to amass such phenomenal wealth:

Set Realistic Expectations

Stocks have historically been the best performing asset class for long-term capital growth, delivering returns in the range of 10-11% annually.  By investing in high-quality, well-managed businesses that are able to achieve earnings growth of 8-13% and buying them at a discount, investors can achieve above average stock returns over time.

Expecting to achieve returns that far exceed the earnings growth rate that real businesses have been able to achieve is unrealistic.  On the other hand, you should avoid listening to doomsday predictions for the stock market.  The Davis family believes that successful investors are not optimists or pessimists, but realists.

Make Stocks a Long-Term Investment

Although stocks are the best investment vehicle in the long-term, the average 11% annual return is not achieved in a straight line.  The history of the stock market is marked by volatility reflecting uncertainty in the political and economic environments.  However, investors must look beyond short-term volatility and understand that certain businesses will be worth more in the future than they are today regardless of these fluctuations.

By understanding how the stock market has performed historically investors can set proper expectations with regards to volatility and stay the course during good and bad times.  A successful investor is undeterred by short-term market fluctuations and understands the long-term nature of investing.

Invest Rationally, Not Emotionally

This is easier said than done, and most people fall short in this area.  Rational investment calls for buying low and selling high, yet most investors tend to abandon this logic when it comes to stock market investments.  They have a tendency to buy stocks when the stock market is going well and they feel confident, and sell when the stock market is down and they feel afraid.

Successful investors maintain a rational discipline that counters the temptation to buy high in times of euphoria and sell low in times of panic.

Avoid Market Timing

A study by Dalbar shows that the average stock mutual fund retuned an average annual rate of 10.2% between 1984 and 2002, while the average investor only gained 2.6% from their investments in those same funds.  The difference is due to buying and selling in an attempt to time the market.

Successful investors know that timing the market is extremely difficult, if not impossible, even for the most knowledgeable investment analysts on Wall Street.  Therefore, they do not attempt to shift their stock allocations based on expected economical or political changes.

Choose Your Source of Information Carefully

The financial media is not the best place to look for sound financial advice.  As an example, in 1981, the year before one of the longest bull markets in the US stock market history, Business Week published the famous cover story “The Death of Equities?”  During the dot-com boom, several publications and TV networks promoted “new economy” companies that have since been out of business.

These are just a few examples that illustrate the fact that the financial media creates more confusion than provides sound investment advice.  Knowing this, successful investors ignore the day-to-day noise created by the media and avoid being distracted from their long-term financial plan.

These simple investment principles have worked fabulously well for the Davis family.  Use them to achieve you own financial success.

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