Berkshire Hathaway Inc. (BRK-A), The Coca-Cola Company (KO): Five Reasons Most Investors Fail

I’ve been actively investing money into the market now for the past 15 years. Over that time I’ve morphed through a number of investing styles — day-trading, trading based on technical analysis, long-term investing, and in the late 1990s even throwing darts. If I’ve learned anything over these years, it’s that investing in businesses and ideas, not a stock ticker, is where the big gains are to be had.

Source: Ryan Lawler, Wikimedia Commons.

So you can imagine how quickly my jaw dropped to the floor when I revisited a study conducted by Prudential Financial in June 2011 that surveyed 1,000 people and asked them two simple questions: Do you still believe in investing, or have you lost faith in the stock market; and when are you likely to put more money into the stock market (within a year, over a year from now, or never). The answers to these questions are an absolute head-banger!

What is your current perception of the stock market?

There are still benefits to investing 42%
I’ve lost faith in the market 58%

Source: Prudential Financial.

When are you likely to put more money into the stock market?

Within a year 25%
Over a year from now 31%
Never 44%

Source: Prudential Financial.

Now keep in mind that when these respondents were surveyed, the stock market had already rebounded a full 100% from its lows! Based on these figures, a full 44% of respondents would have missed out on an additional 26% rally in the broad-based S&P 500 (INDEXSP:^GSPC) which is higher than the historical annual average return of the stock market. Based on the exact date of June 1, 2011, to June 1, 2012, the 31% who chose to wait a year and try to time the market would have come out slightly ahead — but if you moved that date forward or backward by just a few days they, too, would have lost out.

Here are five reasons I’ve learned throughout my years of investing why most investors fail:

  • They’re trying to buy stocks, not businesses.
  • They don’t understand the concept of compounding gains.
  • They don’t feel they have enough money to begin investing.
  • They’re too scared to lose their money.
  • They don’t know how to get started.

And here are some of the ways you can overcome these flaws.

Buy businesses, not stocks
At The Motley Fool you’ll hear us trumpet Warren Buffett, the CEO of Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B) a lot — but with good reason. Warren Buffett invests with the mentality that he’s buying into a company that he thinks would succeed if the stock market shut down for the next 10 years. He believes in the management team of every company he buys and focuses on buying businesses with brand and pricing power. You might refer to them as boring investments, but Buffett just sees these businesses as steady sources of cash flow that will increase shareholder value in almost any economic environment.

Therefore, it shouldn’t come as a surprise that his holding company, Berkshire Hathaway Inc. (NYSE:BRK-A) (NYSE:BRK-B), which just recently announced the purchase of its 58th subsidiary in NV Energy in May, has outpaced the S&P 500 in 39 of the past 48 years. That’s not luck — that’s what happens when you invest in businesses instead of trading stocks.

Invest for the long term and let compounding gains work in your favor
The most abundant mistake often made is when investors attempt to become traders and time the market. While timing the market may work for a short period, it’s been shown time and again that long-term compounding gains achieved through share price appreciation and dividends will outpace the nominal gains achieved through day-trading and short-term holds. According to ABC News, and as I noted last month, of the nominal gains achieved by the S&P 500 (INDEXSP:^GSPC) between 1910 to 2010, dividend yield and dividend growth comprised 90% of all gains.