There is a lot of uncertainty that comes with the stock market, but there are some principles that can help boost your chances of succeeding in the long term according to the Lowland Investment Company.
There are investors who will sell investments that have appreciated to lock in profits then hold to the ones that unperformed and hope they rebound.
But what they forget is poor stocks can tank even further and the good ones climb even higher.
1. Key takeaways
The stock market comes with a lot of uncertainty, but the good thing is you can avoid a lot of problems by having a strategy in place. A good strategy is going to help you make a good return in the long run.
If you have the time, then you need to think more about the future and think of the long-term investments that are going to give you maximum returns.
2. Ride a Winner
There is a popular investor known as Peter Lynch who spoke a lot about “tenbaggers” – these are investments that increase tenfold in value. He said that such stocks are what resulted in him succeeding with the stocks he picked.
This approach is going to ask for a lot of discipline from you because it means you have to hang on to the stocks even if they have increased multiple times in value because you think there is still a potential to go higher.
You shouldn’t cling to arbitrary rules, look at the merits of that stock.
3. Selling a Loser
There is no guarantee of a stock coming back up after it declines, and you need to be realistic when it comes to stocks that perform poorly.
When you acknowledge a losing stock it can feel like a failure for you, but there shouldn’t be any shame in recognizing the mistake you made and selling it off so you don’t lose even more.
You should always judge the stock by its merits and see whether there is future potential or not.
4. You Shouldn’t Sweat the Small Stuff
Instead of panicking when the investment makes a short-term move, track the trajectory and look at the bigger picture. Be confident about the stock in the long term instead of getting swayed by short-term volatility.
You shouldn’t focus on the few cents difference between using a limit compared to a market order.
Active traders are known for using minute-to-minute fluctuations when locking their gains, but long-term investors are looking to make a return over a long period like months or even years.
5. Avoid Chasing the Top Tips
You should never accept a stock tip as valid, no matter the source. Before you invest your hard-earned money in a stock, research as much as possible about the company.
There are times when tips can pan out, but the long-term success of your strategy is going to depend on research.
6. Picking a Strategy then Stick with It
There are different options when it comes to picking stocks, but you should always stick to one. Jumping from one approach to another is going to make you a market timer, which isn’t something you want when investing.
Warren Buffet is known for sticking to a value-oriented strategy even during the dot-com boom of the 90s – this helped him avoid losses when the crash happened.
7. Don’t Put too Much Focus on the P/E Ratio
Investors usually look at price-earning ratios when picking stocks, but putting too much emphasis on them is not a good idea. You need to use the P/E ratio alongside other analytics processes.
Just because a stock has a low P/E ratio doesn’t mean that it is undervalued, or a high P/E doesn’t mean that is overvalued.
8. Keeping A Long-Term Perspective and Focusing on the Future
When you are investing, you have to make decisions using things that are yet to happen. You can use past data to predict what is to come, but there is no guarantee.
Peter Lynch in his book “One up on Wall Street” said that “How is this stock going to possibly go higher?”. He said if he had thought it that way, then he wouldn’t have invested in Subaru stocks after it had gone twentyfold in value.
He checked and saw that the Subaru stock was still cheap. He bought it and then made sevenfold after doing that. It is better to look more in the future instead of past performance.
Short-term profits can attract market neophytes, but long-term investments will achieve greater success. While you can still make money through active trading short term, it involves a lot of risks.
9. Being Open-Minded
Some of the greatest companies out there are household names, but good investments can sometimes not have brand awareness.
There are thousands of smaller companies, like international health insurance companies covering the increasing number of ex-pats, that have the potential of becoming big brands tomorrow. Small-cap stocks have had better returns compared to large-cap stocks.
In the U.S, small-cap stocks had a 12.1% return compared to S$P which returned 10.2% from 1926 to 2017.
This doesn’t mean you should go out there and put all your investments in small-cap stocks. You should pay more attention to the smaller companies and not just those on Dow Jones Industrial Average (DJIA).
10. Don’t Trade Penny Stocks
A common mistake people make is thinking that there is less risk with low-priced stocks.
If a $5 or $75 goes down to zero, you have lost 100% of your investment no matter the price of the stock. Both stocks have the same risk.
It is even riskier to buy penny stocks because they are less regulated and this makes them very volatile and a bad investment.
You can Be Concerned About Taxes, But You Shouldn’t Worry
When you focus too much on taxes, you can easily make misguided decisions. Taxes are very important, but they need to come second to your investing.
High returns are your primary goal and then focus on minimizing your tax liability after that.