3 Ways to Increase Your Returns

Want to become a more successful investor? Avoid expensive stocks such as Microsoft Corporation (NASDAQ:MSFT) and invest in quality, cheap stocks such as Apple Inc. (NASDAQ:AAPL).

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Investing is a mix of science and art. Over time, you should develop a step-by-step, repeatable process that works for you. By following your nature and continuing to do what works for you, you should develop your own unique, successful investing style. Here are three ways that can help you become a more successful investor and increase your returns.

Reinvest your profits

Some investors like to take profit by realizing capital gains and spending them frivolously. It’s understandable to reward yourself once in a while, but be careful not to do it regularly if you’re aiming to save for bigger goals, such as retirement. Regular frivolous spending would be detrimental to your long-term financial goals.

Instead, investors can choose to reinvest their profits and dividends 90% of the time, so the long-term compounding trajectory remains on track.

Be a contrarian

Instead of investing in the next big thing, look for deals in companies that are out of style. It’d be best if the company is a quality one; a big brand with a solid balance sheet.

Mid-2010 to 2012 was a great period to buy Microsoft Corporation (NASDAQ:MSFT), which was trading between the multiples of nine and 11, had the highest-rated credit rating of AAA, and increased its dividend at a double-digit rate.

Microsoft continues to be a great company, but since 2012 investors have been bidding up its price to a multiple of over 20. So, there’s no more margin of safety on Microsoft.

Instead of Microsoft, investors are better off partnering with Apple Inc. (NASDAQ:AAPL), the out-of-favour tech giant. At $110, Apple is trading at a more reasonable multiple of 12 and should be worth over $130. Apple has a strong S&P credit rating of AA+ and a debt-to-cap ratio of 27%.

Lower your cost

Some investors wait until they collect $1,000 before investing. Since the banks charge about $10 per trade, that’s a cost of 1% for each trade. If 1% is too high a cost for you, instead, you can wait till you collect $2,000 before investing in a stock, which will lower the cost to 0.5%

Alternatively, if you want your investments to compound sooner, investing in exchange-traded funds (ETFs) is a viable option as well. ETFs that mimic the performance of an index takes a passive approach and costs much less than mutual funds with active managers.

Summary

You can increase your returns by reinvesting your gains and dividends and looking for value in quality businesses. Additionally, you can lower your cost of investing by trading less and investing in low-cost ETFs.

 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kay Ng owns shares of Apple. David Gardner owns shares of Apple. The Motley Fool owns shares of Apple.

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