4 Successful Investing Strategies To Boost Your Odds

Today, the largest lottery payout in history ? $540 million in ?Mega Millions? ? may go to one lucky soul who beats the overwhelming odds of 175,000,000 to 1.

Unfortunately, it won?t be me.

Since I didn?t buy a ticket my odds are even worse than that (slightly). Instead, I?m counting on the stock market as my eventual path out of the workforce and into retirement.

But both stock market investing and the lottery can be boiled down to the important exercise of estimating your odds. After all, someone is selling me that stock that I?m purchasing. What are the odds that I?m right?and the person on the other end of the trade is wrong?

Its a question that all investors face. To help answer it, here are a few investing strategies that have a good track record for squeezing the best odds possible out of investing in the stock market:

1) Crisis Investing

?People are always asking me where is the outlook good, but that?s the wrong question?. The right question is: Where is the outlook the most miserable??

Ever since super-investor John Templeton showed that there were profits to be made in the most depressing corners of the stock market, investors have been shopping the 52-week-low aisles, trying to follow this advice.

Whether it was in airlines after the attacks on 9/11, or in banks right after the financial crisis in 2008/2009, world events have provided plenty of opportunities for investors to step in and buy when ? as the wall street saying goes ? there is ?blood in the streets.?

Contrarian investing like this requires some serious confidence in your own judgment, and it also hinges on having plenty of liquidity at the moment when cash is king and when everyone else is desperate to cash out.

2) Dividend Growth Investing

This strategy focuses on the elite group of companies that have consistently paid and raised dividends for an extended period ? sometimes 25 years or more. Investing in these aristocrats carries little risk of income cuts and some decent odds of a dividend hike.

While most of the blue-chip companies that make up these lists have long since seen their high-growth days pass, the predictable, diversified, and defensible profits they pull in can pad an investors portfolio with a steady stream of high-quality earnings.

And as a bonus, dividend reinvestment during times when the market is down allows a dividend growth investor to take advantage of dollar-cost averaging and gives a nice consolation while he waits for capital appreciation to catch up.

Best summed up in Jeremy Siegel?s book Stocks for the Long Run, this strategy values what he calls the ?tried and true? over the ?bold and new.? Think Altria, not Facebook.

3) Deep Value

?In the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine.?

This is the strategy that world famous investor Warren Buffett picked up from Benjamin Graham. Focused on distressed companies with price/book ratios at or below 1.0 and price/earnings ratios in the low single digits, this investment strategy is not for the risk-averse because many of these companies are on the brink of bankruptcy.

Deep value investors aim to purchase stocks in companies that are trading below their fair value, sometimes below what they could be sold for in a liquidation sale. The strategy has been compared to scanning the sidewalk for used cigarettes, finding those that are still good for a few puffs, and profiting from the former-owner?s hasty disregard.

While Buffett began investing this way, his fantastic investing performance wasn?t unleashed until he met Charles Munger, who introduced him to my personal favorite investing strategy:

4) Wonderful Businesses

?If you find three wonderful businesses in your life, you?ll get very rich.?

Charles Munger said these words in a shareholder?s meeting for Berkshire Hathaway in 1996. The next year, he confessed that ?the single biggest recurring mistake I?ve made has been my reluctance to pay up for outstanding businesses.?

As you can see from the quotes above, this investment strategy isn?t focused on price, but on characteristics ? like brand power, management quality, and competitive moats ? which don?t show up in financial statements. Buffett made that clear himself when he said that he?d much rather buy a wonderful business at a fair price than a fair business at a wonderful price. It was the combination of Buffett?s fantastic valuation skills and Munger?s eye for stellar business models that let the duo redefine what was possible with stock market success.

Put it All Together

A solid investment strategy pulls together elements from each of these investing masters:

• Like Templeton, look first to areas of the market that wall street has written off, avoid super-popular stocks, and keep a significant fund available for opportunistic buying in case of market turmoil.
• Like Siegel, remind yourself that the best companies of the next decade are often the best companies of the last decade, and anchor your portfolio with proven, long-term winners.
• Like Graham, understand that what?s smart at one price is dumb at another one.
• Like Buffett and Munger, focus on finding great companies and don?t be afraid to pay up for them.

Thanks to Montage for the image.

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