The stock has a reputation for uncertainty, but there are some tried-and-true principles investors can use in boosting their chances of succeeding in the long term.
There are those who chose to sell their appreciated investments to lock in profits while they hold the underperforming investments hoping they rebound. But there is the risk of poor stocks zeroing out and good stocks climbing further. Read on if you want to learn to invest.
Key Takeaways
The stock market comes with a lot of uncertainty, but there are some things investors can do to increase their chances of getting long-term success with their investments.
There is a lot of investment advice out there that includes selling losers and riding winners; picking a strategy and sticking to it; resisting the lure of penny stocks; avoiding the urge to chase “hot tips”.
If time allows it, then consider focusing on the future and keeping an eye on long-term investments that will give you a good profit as an investor.
Understanding Long-Term Investing
Riding a Winner
Peter Lynch is known for speaking about “tenbaggers” – these are those investments that increase tenfold in value. He attributes his success to these stocks.
You need a lot of discipline to hang to such stocks like Safran when they have increased by many times over. This happens when you think there is still a lot of potential for growth.
You need to consider the stock on its merits instead of clinging to arbitrary rules.
Selling a Loser
There is no guarantee that a stock is going to rebound after it has declined. You have to be realistic about the chances of having poorly-performing investments in your portfolio. You can feel like a failure when you acknowledge a losing stock, but there is no shame in doing this and selling the investment off to prevent further loss.
You have to look at the companies and judge them on their merit. This is going to determine whether it has the potential or not.
Avoid Sweating the Small Stuff
Instead of panicking about the short-term movements of your investments, you need to look at the bigger picture. You should be confident about an investment in the long term, you shouldn’t be swayed by volatility in the short term.
You shouldn’t think a lot about the couple of cents difference you can save by using a limit versus market order. There are those using minute-to-minute fluctuations to lock their gains. But if you want to succeed in the long term, it happens over periods lasting years.
Avoid Choosing a Hot Tip
You shouldn’t accept tips as legit, regardless of the source. Research and analyze a company before you invest.
There are times when tips pan out depending on how reliable the source is, but you have to research a lot if you want long-term success.
Picking a Strategy and Sticking with It
There are different options when it comes to picking stocks and you need to stick to one. Using different approaches will make you a market timer, which is a very bad thing when investing.
Warren Buffett is one of the investors and has stuck with the value-oriented strategy and this meant he stayed away from the dotcom boom. This was good for him because he avoided major losses.
Not Overemphasizing the P/E Ratio
Investors usually put a lot of focus on price-earnings ratios, but it is not a good idea to put too much emphasis on a single metric. The P/E ratio works well when used in conjunction with other metrics.
Having a low P/E doesn’t mean that it is undervalued, nor does a high one mean it is overvalued.
Focusing on the Future and Keeping a Long-Term Perspective
Investing is about making decisions based on things that haven’t happened yet. Past data can show what to expect, but there is no guarantee.
Peter Lynch’s investment choices have shown that the market is not that simple. He bought the Subaru stock after it has gone up twentyfold. Many people wouldn’t have touched such a stock, but he saw potential. After buying the stock, the stock made him sevenfold after that. If he had looked at the past performance alone, then he wouldn’t have invested.
You should look at the future potential of the stock instead of its past performance.
Short-term profits usually entice market neophytes, but you need to invest for the long term if you want greater success. While it is possible to make money trading in the short term, you are exposing yourself to more risks when compared to buying and holding.
Being Open-Minded
The best companies are household names, but there are many good investments that don’t have brand awareness. There are thousands of smaller companies with the potential to blow up and become big names tomorrow. Historically, small-cap stocks have offered better returns than large-cap stocks.
Small-cap stocks gave a 12.1% average return in the U.S. from 1926 to 2017, while the S&P 500 had an average return of 10.2%.
This doesn’t mean putting all your money in small-cap stocks. But you need to keep in mind that there are good companies beyond the Dow Jones Industrial Average.
Resisting the Lure of Penny Stocks
There are those who believe that you lose less when you buy low-priced stock. When a $3 stock plunges to $0 or a $100 stock plunges to $0, you have lost all of your initial investment in both scenarios. This means both of them have the same risk.
Penny stocks are a riskier investment than higher-priced stocks because they are less regulated and this means more volatility.
Be Concerned with Taxes but Don’t Worry
You can easily make misguided decisions when you put taxes above all else. While it is important to know about tax implications, they need to be secondary to investing.
Your goal needs to be achieving high returns and then minimizing tax liability comes after that.