3 Ways to Make the Best Stock Investments

In all intellectual pursuits, it pays to study the greats: the people who are widely recognized as the best of the best. In investing, these legends include Warren Buffett, Peter Lynch, Benjamin Graham and a host of others.

Below are three tips for making the best stock investments from two of history’s most successful investors: Buffett, the CEO of Berkshire Hathaway (NYSE: BRK.A), and Lynch, the legendary Fidelity Magellan fund manager.

  • Be patient and wait for the fat pitch: This tip for making the best stock investments is a Warren Buffett original that Investing Daily’s Jim Fink mentioned in a December 2011 article.

    “I call investing the greatest business in the world because you never have to swing,” said the Oracle of Omaha in 1974. “You stand at the plate, the pitcher throws you General Motors at 47! U.S. Steel at 39! And nobody calls a strike on you. There’s no penalty except opportunity lost. All day you wait for the pitch you like; then when the fielders are asleep, you step up and hit it.”

    Fink pointed out that Buffett repeated this in 1984 and again in Berkshire Hathaway’s 1997 letter to shareholders. “When Buffett repeats the same thing over and over again, it’s worth taking seriously,” wrote Fink.
  • Competitive advantage trumps management: This advice for making the best stock investments comes from Peter Lynch. It’s closely related to another Lynch favorite: “Never invest in any idea you can’t illustrate with a crayon.”

    “Getting the story on a company is a lot easier if you understand the basic business,” Lynch wrote on page 130 of his 1989 book One Up on Wall Street. “That’s why I’d rather invest in panty hose than in communications satellites or in motel chains than fiber optics. When someone says, ‘any idiot could run this joint,’ that’s a plus as far as I’m concerned, because sooner or later any idiot is probably going to be running it.”

    “If it’s a choice between owning stock in a fine company with excellent management in a highly competitive and complex industry or a humdrum company with mediocre management in a simple-minded industry with no competition, I’d take the latter.”

  • Strong growth stocks are worth paying for: When looking for growth stocks—or companies that are expected to increase their revenues and earnings faster than the average firm—it’s important not to get too hung on price. The best stock investments among these companies typically don’t come cheap because they possess so many attractive qualities, such as consistently growing earnings, competitive advantages and solid business prospects.

    Warren Buffett put it best in his 1989 letter to Berkshire shareholders (and yes, he’s repeated it many times since): “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

    “Wonderful companies quickly outgrow their high valuations and turn out to be bargains,” wrote Fink in an April 2012 Investing Daily article.