The One Strategy That Beats Wall Street

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This post The One Strategy That Beats Wall Street appeared first on Daily Reckoning.

Dear Reader,

Wall Street is a scam.

I’ve said it probably a thousand times. It’s something I know from experience. Over the past 15-plus years, I’ve tried just about every investing strategy in existence.

I’ve run a hedge fund that was successful. I ran a fund of hedge funds, which means I’ve probably analyzed the track records and strategies of about 1,000 different hedge funds.

I’ve written several books about my experiences, but I can summarize everything I’ve learned in just one basic idea. The best way to make money in stocks is to hold forever.

I know what you’re probably thinking: You’ve heard stories about big-shot traders that rake in millions. My colleague Tim Sykes, for example, has certainly struck it rich jumping in and out of stocks.

But let’s face it, success stories like Tim’s are rare. And there will always be a few people who get lucky. That’s how luck works.

But all my years of experience have led me to strategies that generate consistent, market-beating returns. Having an arsenal of diverse strategies is the key to unlocking enormous wealth (go here to learn about one of the best).

I get emails every day from people who say they have a system that beats the market. They’re usually really nice people. I’m sure they’re talented and hardworking. And their ideas are usually terrible.

Here’s the problem…

There are millions of talented people trying to beat the market. They’re smart. They’re hungry. And they spend their time finding every advantage possible — the fastest computers, the best data and the most valuable inside information.

I’m telling you what I know from experience.

The only folks that make millions without these advantages are the ones like Warren Buffett and Bill Gates. They’re committed to owning a stock for a long time.

Warren Buffett has never sold a share of Berkshire Hathaway since 1967. Bill Gates sells a little nowadays, but basically held his Microsoft stock for decades.

Every great investor will tell you the same thing. They’ve all used “compounding” to make a significant portion of their wealth.

In short, compounding involves reinvesting the money you make from an initial investment in order to make even more money. As you keep reinvesting the money, the effect multiplies. Over a long period, you can earn staggering profits on your original investment.

So what kind of stocks should make sense for this strategy?

“A company is only worth the money you get back from it.”

That quote is from Mark Cuban. Mark is tremendously successful. He made his first billion by selling his company, Broadcast.com, to Yahoo back in 1999. Most people call him lucky for selling at the top.

I don’t think he was lucky. I think he’s one of the smartest people I’ve met. If he didn’t make a fortune on Broadcast.com, he would’ve made a pile of money on something else. That’s what the smartest investors do. The quote above is something he said to me a few years ago. It stuck with me because it’s so simple.

When I first met him in the ’90s, I would never have imagined him being a dividend lover.

Nevertheless, a few years back Mark dropped this line — “I believe non-dividend stocks aren’t much more than baseball cards. They are worth what you can convince someone to pay for them.”

Again, he makes a great point.

Dividends are the simplest way to collect a piece of a company’s cash flow. When a company pays a dividend, it shows they’re serious about sharing profits with investors. Every other smart investor I’ve met says the same thing.

Warren Buffett is still the best-known dividend aficionado. Each of his top 10 stock holdings pays at least a 1% dividend yield (as of his latest reported holdings). His amazing track record is a testament to the power of compounding.

As I mentioned earlier, Buffett believes in holding stocks for decades, if possible. He has a unique way of looking for companies to invest in…

You see, he doesn’t look at P/E ratios. He’s not a value investor in the classic sense. He bets on demographic trends. The most important investing quote he’s ever said is, “If a company will be here in 20 years, then it is probably a good investment now.” This is not always true. He said, “probably.”

So what companies will probably be here in 20 years? I have no clue. Nor does he. But I will bet on the companies that are returning cash to shareholders. They’re called Dividend Aristocrats.

The term “Dividend Aristocrats” refers to an exclusive group of companies that have increased their dividends every year for at least 25 consecutive years.

The list represents the best, most reliable stocks out of the thousands of companies in the stock market. The requirement sounds pretty simple, but it’s an extremely high bar for a company to aim for.

You see, lots of companies are profitable. Lots of companies use dividends to distribute their profits to their shareholders. And lots of companies have long streaks of paying out dividends.

But only a few businesses raise their dividend every single year for decades. Keep in mind, companies are constantly dealing with changes. There are a million things that can go wrong, messing up management’s growth plans.

Over a 25-year stretch, you’re guaranteed to run into recessions, shifts in technology and consumer tastes. Meanwhile, every profitable business faces competition.

The more profitable you are, the faster your growth, and the more competition there is for every dollar you collect.

That’s why the Dividend Aristocrat title is such a big deal. It means a company has delivered the kind of stable growth that every smart investor looks for. It means the company has a disciplined approach to deploying capital.

In short, it means the company is extremely well run.

Not surprisingly, research shows that these companies do better than the rest of the market over long periods.

According to S&P, the S&P Dividend Aristocrats index returned something like 225% over the past 11 years or so. That’s more than 90% higher than the S&P 500 index over the same timeframe.

That’s why every smart investor should know about dividend-paying stocks. And why, when looking for those stocks, the Dividend Aristocrats list is the best place to start. You can look them up online.

But if you’re looking for a safe way to supercharge your retirement, go here.

Regards,

James Altucher
for The Daily Reckoning

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