It’s a proven fact that investing in the stock market is one of the best wealth-building tools available. But with an overwhelming number of strategies and choices out there, it can be difficult to even get started.
For long-term investors, I firmly believe that it’s best to avoid manias like what’s been happening with meme stocks in 2021. Instead, the best course of action is to keep things as simple as possible and follow a tried-and-true plan.
Keep reading to learn about a great strategy you can use to generate top returns.
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A simple strategy
No one knows with any level of certainty what the stock market is going to do next week, month, or even year. But over the longer term, which in my view is at least five years, buying high-quality businesses is the optimal investing strategy. There will be times like this year when different trends, such as the meme-stock craze characterized by AMC Entertainment Holdings and GameStop, flood the financial media and cloud your judgment.
Look for businesses that are easy to understand, have a competitive advantage, and are proven winners. And stay invested through the inevitable ups and downs. Even more important is the ability and willingness to periodically add to your investments over time. This is called dollar-cost averaging, and it significantly raises the chances that you’ll produce better returns than most other investors who constantly try to time the market.
Two companies that fit the description of this strategy are Home Depot (NYSE: HD) and Nike (NYSE: NKE).
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Leading home improvement chain
Home Depot, with trailing-12-month sales of $144.4 billion, is the world’s biggest home improvement retailer by sales. The company provides equipment, tools, and supplies to help do-it-yourself and professional customers complete their renovation projects. There are currently 2,298 Home Depot locations, with most in the U.S.
Thanks to a robust distribution network dubbed One Supply Chain, the company is able to get the right products to its customers in a timely manner. An incredible 90% of the U.S. population lives within 10 miles of a Home Depot location. And because of its scale advantages, the business has been able to double its profit margin from 4.9% in fiscal 2010 to 9.7% in fiscal 2020.
Home Depot has been one of the best stocks ever to own. Since going public in 1981, shares have skyrocketed 1,700,000%! Being such a vital part of the American economy, with people viewing their homes as a lifelong investment, Home Depot’s products will always be in demand.
Top apparel business
Nike has been one of the world’s leading apparel brands for quite some time, emphasizing quality, comfort, and a coolness factor for its popular clothing and footwear. Utilizing both in-store and digital sales channels, The Swoosh generates 40% of revenue from North America, 27% from Europe, Middle East, and Africa, 16% from Greater China, and 12% from its Asia Pacific and Latin America segment.
Unsurprisingly, Nike’s competitive advantage comes from its powerful brand, which is recognized everywhere. High-value endorsement deals with superstar athletes like LeBron James and Cristiano Ronaldo boost the brand’s image with consumers who want to connect with a winning mentality. It’s kept Nike’s gross margin, a signal of pricing power, greater than 42% for nearly two decades.
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The world will always love sports and competition. But Nike’s ability to sell apparel for performance and for leisure has led to its remarkable success. The company does just as good a job marketing to fans of its casual footwear as it does for real athletes. Morphing into a true lifestyle brand is why the stock has soared almost seven-fold since October 2011.
Keep it simple
It’s extremely easy to get caught up in the latest hype sweeping over the stock market, including meme stocks. But identifying companies like Home Depot and Nike that have simple business models, possess key competitive strengths, and have a long history of success is a winning portfolio strategy.
And don’t forget to focus intensely on the long term. It’ll help you better ignore the persistent noise constantly fighting for attention.
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Neil Patel has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot and Nike. The Motley Fool has a disclosure policy.
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