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How to invest in the stock market?
If I were to rank the stock market-related questions I’ve received, this question above would be at the top of the list. I won’t sugar-coat it: it’s really difficult to learn how to invest in the stock market. I don’t know about you, but I found it difficult to write my own name on paper for the first time. Everything is difficult until you begin studying it.
To help you start smartly in the stock market, I’d like to present 20 tips. The world-renown investors you look up to must have already said one of these.
- It is not stupid to be simple.
In the stock market, keeping it simple is not being naive. Blaise Pascal, a 17th century philosopher, once stated that all miseries of man come from his incapability to sit alone in his room quietly. This is a good quotation that applies well in stocks investment.
If you trade often, it is likely you will concentrate on data points that are irrelevant to decision-making. Moreover, you may even forecast something immeasurable. People who do these things are more probable to encounter unpleasant investment shocks.
Keeping it simple is better in enhancing your chances of succeeding in the stock market. Simple means you will require safety margin when buying, concentrate on profit-generating companies, and invest in a long-term commitment.
I’d also like to advise those who want to learn how to be a chartist. The profitability in stock trading is not based on how many indicators you know. A chartist who knows how to draw a butterfly or a bat on his chart does not necessarily mean he’s better than the one who relies on Fibonacci. You can draw Barney on your chart and still be profitable. Kidding aside, keep your strategy simple. Customize it for you.
- Never expect quick wealth.
It is possible that people who invest in stocks anticipate quick wealth. Well, can I say that not only is it possible, but it has also been more than a century ago? This is not an exaggeration. In fact, teaching our clients how to tame their longing for quick gains is one of the psycho-related things we help them about.
Here’s the ratio between success and risk. Big returns have big risks. Bigger returns have bigger risks.
The average measure of returns you could get from stocks investment is 10 to 12 percent. This is inclusive of assets that provide the highest generation. There is a greater deal of unpredictability with the said yields.
Your unreasonable behavior in stocks investment will likely ensue if you do not have proper returns and volatility forecasts. You will continue capitalizing on quick wealth strategies with high risk, cursing stocks due to minimal loss, and trading than the normal level.
For young investors, I suggest you filter stocks based on their statistical volatility score from lowest to highest. Start studying the financial sheets of the ones with a low statistical volatility. The bigger the statistical volatility, the higher the risk.
- Have a long-term goal.
Anticipate that volatile stocks are what you will encounter in the short term. You will observe that they go up and down as the market’s sensitivity is still apparent. It is indeed exasperating to predict the short-term response of the market, making it impossible to do so.
Out of this context, you have to keep in mind what Benjamin Graham stated. According to him, a voting machine and market are alike in the short run. It tallies the unpopular and popular companies. Nonetheless, in the long run, it will turn into a weighing engine concentrating on the firm’s substance.
Many investors get barmy for their company stocks do not even move. This is the consequence of simply concentrating on popularity competition, which occurs in the market every day.
If you want to win long-term, you have to focus on the fundamental performance of the company. Over time, your business production of cash flows will be recognized by the market properly. In the Stock Signals, we strike a good balance in our assessments by providing our clients fundamental and technical updates.
- Disregard the media outlets’ noise.
Investors’ attention is often the goal of media outlets. They focus on releasing statements about various markets’ movement and justify them thereafter. This is inclusive of money prices, stock prices, oil values, and a lot of guesses in between. They speculate what caused the climb or drop. Have you noticed the style of other companies who publish a press release with a positive title and an optimistic introduction despite the near zero or negative net income? Have you also noticed those who publish positive press releases before they release negative financial reports?
Nonetheless, the changes they claimed to have affected the market greatly do not even represent the real picture of alteration. The markets’ movements they are referring to just pertain to volatility. This is constitutional to any field.
If you will ignore this noise, you will be able to focus on what is highly important – the companies’ performance. This is similar to becoming a better basketball player. You will not improve if you will just focus on statistical sheets. You will not improve if you’re only good at commenting in front of a TV but you haven’t dribbled a basketball in real life. You have to practice and work out. As an investor, the equivalent is to get to know the companies in and beyond the market.
- Act like a real company owner.
Though you are simply an owner of a stake in a company, it is important for you to understand that stocks represent companies’ interests. If you will buy a portion of the business shares, you should act as an owner as well.
This pertains to the fact that financial statements reading and analysis are necessarily done. You should do this habitually while making trend forecasts, weighing businesses’ competitiveness, and preventing an impetuous behavior.
In the “Always Have the Investor Mentality” newsletter I sent to our clients way back November 2014, I emphasized that it is a must to think like the owner of the company you’re invested into. That’s one way for you to make a sound decision that you won’t regret later. I am a business owner. When I make a decision for my businesses, I think long-term. I am forward-looking.
- Buy low and sell high.
Stock prices should not only be your bases whenever you buy or sell. Some people buy stocks because of price hikes. On the other hand, others sell stocks because the assets’ previous performance is below expectations.
Always remember that when stocks fall, they are low. This is the right time to buy. Alternatively, if the stocks experienced a hike, their values are high. It is the right time to sell. Now, as to what price you should buy or sell, that’ll be based on each and everyone’s personal assessment and game plan.
You have to get rid of greed when stock values rise and fear when stocks fall that make your decision-making inefficient.
- Be cautious in relying on specific reference point.
The concept of anchoring has long been discussed by stock investment experts. It pertains to reliance on a certain reference point. Some investors consider a certain number where they will affirm the price they compensated for a stock and measure their performance. This is done by those who are inclined into doing a technical analysis as their basis for their decisions.
On the other hand, fundamentalists concentrate on the fact that stocks are valued. Eventually, the assets are weighed on the measure of forecasted future cash flows the companies will produce.
This is one of the reasons why we provide both fundamental and technical insights for our clients in the Stock Signals because we know that some have a bias on technical analysis while some have a bias on fundamental statistics. Be wary of where you set your anchors.
- Economics is more static than the ever-changing management.
You will not win a race if you are driving a racecar having half of the horsepower of your competitors. In addition, you will not be able to journey a ship across the ocean if it has a broken rudder and hull. This is irrespective of being the world’s best skipper.
Keep in mind that management changes over time, whereas economics could be more static. It is better to prefer a business with a mediocre management but has high economic returns than a company with clever management but has terrible returns.
However, please don’t misconstrue my message for I am not saying that it’s okay even if the company has an unethical or misbehaving member in their management team. This will lead you to point # 9.
- Snakes are everywhere.
The company’s capital stewards are highly important regardless of the economics being the key to effective investment. If snakes are in control of an organization, an reasonable company could still end up with poor investments. Watch out for businesses having management and compensation practices that are not pragmatic.
One way of watching out for snakes is remembering the parable about the reptile. One winter evening, a man came across the reptile while on his way. The snake asked if the man could help since it is hungry and cold. If not helped and left, the snake will die alone. The man retorted that the snake will likely bite him. The reptile pleaded and guaranteed not to bite the man.
The man contemplated about it and took the snake home. He helped the snake warm by the fire. He even prepared food for the reptile. After enjoying their meals together, the snake bit the man.
The man asked why the snake bit him now that he offered much generosity. The reptile simply replied that the man knew it was a snake in the first place.
- History may repeat itself.
Stocks investment also welcomes the idea that past trends could happen again. Although financial disclaimers stated past performance will not guarantee future results, it could still be a good indicator of a routine.
Consideration of past performance is essential for investment and company managers. There are times company managers would find unexpectedly located business opportunities.
You should mull over a firm that has a record of expanding its profitability by entering new lines of business. Winning managers are worth sticking by.
- Be cautious of value traps.
There are situations wherein a business would do faster, especially if it is nearly deteriorating. You have to be wary of businesses that generate little to no economic value and look contemptible. Alternatively, your expectations will surely be exceeded when you deal with strong companies having aggressive advantages.
You should establish a big margin for troubled businesses. Contrastingly, you should narrow your margin to companies with shareholder-friendly management team and competitiveness.
- Surprises recur.
Anticipate that unexpected happenings in the stock market may take place again. This does not only pertain to negative surprises, but to positive ones as well.
To keep this in mind, just remember the cockroach theory. It is possible that the first cockroach you will see is not the only one around. There may be scores of them that are not visible.
This is one proof why you need to have a game plan before you trade or invest in a stock. Do not join the league of “buy now, ponder later” investors.
- Keep the line between patience and stubbornness thick.
Unfortunately, the line between being patient and stubborn in stocks investment is fine. If you want to practice patience, you have to watch companies than the prices of their stocks. Let your theses of investments take part in the game. Your patience would likely pay off if your acquired stocks have fallen and the company is stable.
Nonetheless, you may be going beyond being patient if you regularly take regard of bad accounts. Stop understating the essence of falling financials. Remember that it could be expensive to be a stubborn stock investor.
To help yourself become patient and build wise decisions, you should ask yourself two questions. First, what is the current value of the business? Second, imagine you do not own the business share yet. Will you buy it? Self-talk helps.
- Your gut matters.
In making decisions, you also have to listen to your gut. The assumptions you made are equally effective with your valuation model. It is valuable to check your calculations and forecasts if your model’s output is not making any sense. You may consider replacing oracles with Discounted Cash Flow (DCF) valuation models as guides. I advise you watch the video below to know more about a DCF.
- Identify your friends and enemies.
Your investment thesis on a company will be more effective if you have “screeners”. First, you should determine the short interest in a stock you are planning to buy. Second, check out the company’s mutual funds and their fund managers’ record. Third, investigate if there is a meaningful ownership stake in the management. Lastly, verify if there are sellers and buyers that are inside the company.
- Search for signs of exit.
You have to know when to stop buying and start selling. You should not invest in an asset claimed by the crowd as a stabilized stock. Take note that market volatility is present. If you also see people investing into companies they have no idea of, you should not deal with such venture.
If, after buying a stock, you’re asking yourself where to exit if this and that happen, it means you don’t have an investment plan. You must establish your entry, greed level (price where you will stop buying the stock to avoid chasing the stock all the way to the top), and trailing stop-loss price points BEFORE you invest in a stock.
- Look for company with forecasted long-term growth.
You should search for a company that ascertained their earnings will increase in five to 10 years. This type of business is usually found in business groups having wide economic moats. It is more preferable to deal with companies that increase their shares’ intrinsic value over time. By doing so, you could be more willing to hold for a long time and be patient. In simpler words, look for resilient companies. Read their long-term business plans on press releases that are published either on the company’s website or on PSE Electronic Disclosure Generation Technology or PSE EDGE.
- Never buy without a target selling price in mind.
You have to begin with an end in mind. Even before you add a stock in your portfolio, you should already know your specific, measurable, attainable, and realistic target selling price. During valuations, identify if there’s a need to upgrade, retain, or downgrade your target selling price.
- Never forget your safety margin.
Irregularity of the market will stay forever. This is the reason why you have to keep a margin of safety to protect your acquisition of stocks. You should know when to stop chasing the stock all the way to the top (we call this price as the Greed Level Price in the Stock Signals). You should also know when to exit when the price is not moving in accordance to your expectation.
- Go against the grain.
Stocks investment is more into leaving the crowd. Great investors have chosen to acquire zero comfort than to rely on others’ stock recommendations. You should not invest into an asset everyone capitalizes in. Crowd is often wrong in the stock market, which is why it is worthwhile to leave the group.
In the Stock Signals, we don’t give predefined stock recommendations. The Stock Signals is a service where we tell you our fundamental and technical insights for stocks. Because we do not plant stock names in the minds of our clients even before they get the chance to know what’s happening in a stock, they develop that sense of a good pride in themselves for having been taught of the ability to see what’s buy-able, hold-able, and sell-able in any stock instead of being spoon-fed on what to buy, hold, or sell.
I operate a thesis consultation service for students in the information technology industry. It is not surprising that a vast majority of our clients are willing to pay the price for us to do their thesis from programming to documenting everything. I can’t imagine tagging my name along with students who graduated without an in-depth knowledge of their course. We do not sell “thesis in a box”. We provide a thesis consultation service where we mentor you and give you pieces of advice not only for you to pass your thesis, but also for you to bag that Best in Thesis award and be proud of it because you sweated it out.
This is the same core principle in the Stock Signals. We do not want to spoon-feed you with a readily available list of stock recommendations. We’ve realized that brainwashing your mind and expectation with a readily available list of which stocks to buy will make you psychologically and intellectually paralyzed. Stock recommendations will make you forever reliant on the provider of that stock recommendation service. Instead, we will equip you with the discipline, skills, and tools on how you can create a personal stock recommendation for yourself ANY TIME and ALL THE TIME!
Take note that it is not about having exceptional wit in investment. It is more in exhibiting a proper temperament, especially when things go wrong. By being strategic and data-driven, you could sell at the top and buy at the bottom, resulting to your lead.