6 ideas
Phelps argues that many investors who at some point owned stocks that later rose a hundredfold failed to profit because they sold too early, not because they failed to find them. The skill he stresses is the patience to sit through years of volatility and apparent stagnation, since his examples took anywhere from four to forty years to multiply a hundred times.
Phelps's prescription starts with buying companies that earn high returns on capital and can keep reinvesting earnings at those rates for a long time. The compounding of those reinvested earnings is what makes the owner's return grow, so identifying such a business is the first half of his 'buy right and hold on.'
Phelps redirects attention from the price of a stock to the earning power and growth of the underlying company, treating market quotations as noise around a slowly revealed business value. From this angle, a falling price on an improving business is an opportunity or a non-event rather than a reason to sell.
When a profitable position is sold, capital gains taxes and commissions remove capital that would otherwise have kept compounding. Phelps calculates this hurdle and argues that a switch to a somewhat better stock often fails to beat simply holding a good one, because the new position must first recover that drag.
Extraordinary returns come from compounding earnings growth multiplied by expansion of the price-earnings ratio as the market recognizes the company's quality. A stock bought at a modest multiple before its growth is appreciated gets both engines, so the return far exceeds the growth in earnings alone.
Phelps holds that trying to time market tops and bottoms leads investors to sell great companies during downturns and miss the recoveries that carry most of the long-term gain. He advises putting effort into understanding businesses and social and technological trends rather than predicting the market's next move.