Identify Good Businesses
In investing, the first key to winning the game is identifying good businesses with a sustainable competitive advantage. These are companies that you know will increase in value in the long term, like Alphabet, Amazon, Procter & Gamble, Unilever, etc.
Buy When the Stock Is Undervalued
The second thing is being able to calculate the intrinsic value of the company at any point in time. For example, if we know the intrinsic value of Company X is $50 per share, we buy when the share price is selling below the intrinsic value, say, $40 per share. When this happens, we say the stock is undervalued. Conversely, when the price is above the intrinsic value, it is overvalued.
As investors, we want to buy during short-term market corrections. When there’s some kind of crisis and the price goes below the intrinsic value, we buy when it’s undervalued. Now that’s what we call “value investing”.
Buy When the Stock Has Upward Momentum
But the trouble with value investing is this: Sometimes when you buy cheap, cheap can get cheaper. I believe the best way is to use Value Momentum Investing™, which means we don’t just buy when the price is below intrinsic value — we buy when there’s also upward momentum. Price is undervalued and is starting to move up — that’s the best time to accumulate the stock.
Invest with a 90% Win Rate
Now, when you hold a good stock over time and allow it to compound your wealth, what’s the win rate? In investing, the win rate should be 90% to 95%. In fact, my personal win rate in investing is close to 100%. Because once I find a good business I know for certain it will always go up over time.
Of course, a good business can possibly become a lousy business, so you have to know when to exit an investment once the value starts to go downhill (when the company loses its competitive advantage).
In investing, we don’t put stop-losses, because when you’re buying a good business, you’re confident that it will increase in price over time. So even if the price drops in the short run, you can average down by buying more as it goes lower.