Using This Simple Strategy Is The Best Way To Invest

| September 24, 2012 | 0 Comments

There seems to be just as many philosophies on how to invest as what to actually invest in.  Most asset managers have strong beliefs on what does – and doesn’t – make money in the financial markets.

The funny thing is, these managers often completely contradict each other.  How can these guys all be right if their opinions differ so greatly?

Well, for one, they aren’t all right.  In fact, many of them don’t perform well enough over time to beat the overall market or simple index funds.  But the key words are ‘over time’.  Depending on your time horizons, all different types of investment strategies may work.

For example, depending on your investment goals, it’s easy to make a case for large caps, small caps, growth stocks, value stocks, dividend stocks, bonds, commodities, and others.  In other words, there’s typically not a simple answer to what investment strategy an investor should use.

Well, I take that back.  There is one time-tested strategy that works far more often than not… buying low.

If an investor has a medium to long-term time horizon for holding investments, buying low almost always results in gains.  It’s the nature of the markets for stocks and other financial products to revert towards historical averages.

In other words, if a stock is trading well below its historical average price level (assuming the company isn’t going out of business), there’s a good chance it’s going to go up over the long-run.  That’s why things like diversification and dynamic asset allocation work.

Here’s a perfect example…

Let’s say around this time last year, an investor ignored the rising fears related to European debt crisis and invested in three down and out industries.  So, this investor purchased a cross section of stocks in Home Construction, Home Improvement Retailers, and Mortgage Finance.

Today, that investor would have made significant profits on all three positions – from 55% all the way up to 135%.  What’s more, the time and research needed to make these shrewd investment decisions were minimal.

I can explain this strategy in two words – buying low.  It’s as easy as that.

So then, now that you see how simple it can be, let’s take a look at the poor performers so far this year.

The top three are pretty much what you’d expect if you’ve been following the markets closely… Coal, Mining, and Aluminum.  Essentially, the basic materials industries based on industry and energy.

Here’s the thing…

The three industries I mentioned should improve with the economy.   As such, if you expect the economy to be better off a year from now (and you’re willing to wait), then these are the areas to buy low in.  As always, I recommend mixing in as many small cap stocks as is reasonable.

Yours in profit,

Gordon Lewis

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Category: Investing in Penny Stocks, Penny Stock Tips

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