Investing in the stock market can be highly profitable, but not all investments generate exceptional returns. According to historical data, the average annual return of the U.S. stock market is around 7-8%. However, some investors are able to consistently beat the market and earn annual returns of 10% or more over long periods of time. This article analyzes why certain stock market investment strategies can achieve such outstanding performance.
Utilizing Fundamental Analysis to Identify Undervalued Stocks
Fundamental analysis involves thoroughly evaluating a company’s financial statements, management team, products/services, industry trends, and other qualitative and quantitative factors to determine if the stock is underpriced relative to its intrinsic value. Legendary investors like Warren Buffett and Benjamin Graham utilized fundamental analysis to identify high-quality yet undervalued stocks that went on to deliver exceptional returns over decades.
Applying a Margin of Safety to Minimize Downside Risk
Another hallmark of investors earning consistent 10%+ returns is their strict adherence to margin of safety principles. This means only purchasing stocks trading at a sizable discount to conservative estimates of intrinsic value. This provides a buffer that minimizes losses during market declines. Investors like Seth Klarman and Howard Marks are staunch proponents of margin of safety.
Holding a Concentrated Portfolio of Best Ideas
Many top-performing stock pickers own just a handful of stocks at a time – typically their highest conviction ideas at that point. Holding a portfolio of 10-15 stocks enables them to thoroughly research and track each position. It also allows their best ideas to meaningfully impact overall returns rather than getting diluted away in a more diversified portfolio.
Ignoring Short-Term Price Action to Focus on Long Horizon
Exceptional investors also tune out short-term market fluctuations and noise to concentrate on long-term business fundamentals. They hold stocks for 5-10 years on average, allowing the power of compounding to boost returns. Avoiding reactionary trading decisions helps minimize transaction costs and taxes which further enhances overall gains.
In summary, investors able to consistently earn 10%+ annual stock market returns utilize proven strategies like fundamental analysis, margin of safety, concentration, and long investment horizons. These help identify outstanding yet undervalued stocks and enable compound growth over years and decades.