6 Timeless Rules Of Stock Market Investing
You don’t need to have the brains of a rocket scientist to profit from investing.
Actually, if you are to put the statistics together, you will amazingly find that there are only 3 possible outcomes no matter what you invest your funds in – Win, lose, or draw.
If we are to describe investments in this manner, then it means that you only have a one-third chance of losing money. Those are better odds than your chances of leaving a casino better off.
So why is it that an average investor is more likely to do worst than the market? Meaning they would have generated better returns should they just put their money in index funds like the Dow.
Don’t blame your stock broker for fleecing you off with exuberant commission fees. You knew beforehand what the charges were. Don’t blame your luck for never being at the right place at the right time. You never went out to network with other investors. And don’t blame your mother for being a psychological barrier due to her expectations of you. You know she loves you unconditionally no matter what you do.
The problem with investors who never break out of their underperforming portfolios is often an emotional and somewhat psychological one. It’s very much a mindset that makes superstar investors stand out from the rest. And this difference in mindset alone can bring changes to how you approach investments.
1) Specify your goals
You don’t just need to know what your goals are. You have to be specific with it so that there is a clear target for you to reach towards. Then understand the reasons why you want to reach that goal in the first place.
For example, a target could be to make $100,000 this year. In terms of stocks, you could eye a particular price point a stock has to be before you snap them up by the bucket load. Or only buy stocks that have a certain P/E ratio which you have determined, only take a liking to companies in a certain industry which you are well-versed in, only analyze companies who have a track record of giving out handsome dividends, etc.
The brain works in mysterious ways. When you put some clarity in what you want, you will be able to plan with more focus, and more importantly, you will innately understand why you must follow through on your commitment.
2) Go long term
There are very few opportunities available to consumers that provide high returns in the short term, unless you count scams as opportunities as well.
Short terms investments, especially in the stock markets, are very unpredictable. The people who make a fortune from short term stock positions are usually those who are “in the know”, and well connected, as well as actively involved in the industry. The average Joe playing genius stock picker at home is not going to have the scoop on real time happenings.
This is why your best bet to make big money from investments is to think long term wealth accumulation instead of short term windfalls.
Many people argue that when stock markets fall, investors sell like crazy in order to get out of a bad spot. But do remember that for every share that is sold, someone is buying. This is because long term investors find market crashes as the best times to load up on their inventory of stocks.
When you think long term, the bulls and bears will bother you less. You might sweat a little should prices tank. But reminding yourself that you are holding for the long run should reinforce your commitment to your strategy.
If you need more convincing, consider that every market worth noting of is worth more today than it was 20 years ago. It’s a sure win. Start looking at time frames in terms of years instead of weeks or months.
3) Buy at low costs
I assume that you are not hedge fund manager or holding a job in a similar capacity. You don’t need to spend those millions in order to file your accounts in accordance to accounting standards. You have no customers to answer to except your wife. And you certainly don’t need to call a board meeting in order to get the go-ahead from the board of directors to make a decision on a mutual fund.
So keep your own personal accounting as simple as possible. And I mean as simple as money in and money out, with an eye on the bottom line.
This implicitly means that you want to keep costs as low as possible, and returns as high as possible. But since you are now investing for the long term, you will not be seeing any real inflow for a while. So the focus will be to get a choke-hold on costs.
In a weird way, it is easier to buy low than to sell high. And if you are to ask people who have successfully made a pile from investments like stocks, they are more likely to credit their success to entering the market low instead of exiting the market high.
4) Pay attention to fundamentals
There are many industry players who have extremely different views on fundamentals. And both sides have a lot of data and evidence to prove their points.
Would you buy into a company that has yet to be profitable? If you think that’s ridiculous, then what do you have to say about those who have made a fortune from investing in companies like Twitter? The real world don’t make a lot of sense sometimes doesn’t it?
The point is that if you do not understand a business or industry enough, please stick to the fundamentals. It’s a risk not worth taking. Just look at the dot com bubble in the late 90s.
When you are the average adult just trying to make your money grow a little faster than inflation, take the safer route and buy proven winners, albeit with a lower up side. Blue chips have track records of success and dividends. There is a much lesser risk of losing your shirt compared to a company you don’t understand. Read Warren Buffet.
5) Be wary when something looks too obvious
The biggest benefactors of market swings are those who can spot a tsunami while everyone else is unknowingly riding it. When even the waiter can tell you which stocks are sure to break through it’s resistance ceiling, it is time to step back and assess what is really going on.
Gurus will tell you that in times of uncertainty, you can make a lot of money by entering and exiting the market simultaneously. But if you think about it, the only people getting rich are the stockbrokers cashing in your checks… and the gurus who are selling you $5,000 weekend seminars on trading strategies.
Just remember to dig deeper if a decision appears too simple to make.
6) Consume financial news with a pinch of salt
You need to conduct your own research to make your own investment decisions. Financial media often have segments where resident experts give calls on buy, hold, and sell.
Those are just their personal opinion!
Don’t think for a moment that they know better than you. They might have better access to data and information. But how they make sense of those information (if they do at all) have no bearing to how you should spend navigate your investment funds.
The mortgage crisis of 2008 was shocking not because of the scale of the damage, but because even days before everything went tumbling down, experts still did not see it coming. So don’t make a fool out of yourself by acting on advice from financial magazines and newscasters.