When it comes to stocks, those who have an opinion exceed those with no idea. Here are some ideas worthy of your attention.
An investment professional, Michael Burry, was one of the few who predicted the 2008 mortgage crisis and the financial collapse. That day, lots of people were thinking that the housing market is a solid investment which will keep growing forever. As in many stock market stories, the majority was wrong once again!
When it comes to the stock market, everybody knows which stocks to pick, which assets will perform the best in the upcoming years, and everyone knows a hidden gem no one else has discovered yet. Let’s first start with muting all that voice when giving an investment decision.
As you shouldn’t get health advice from an anonymous Twitter user with a cartoon avatar, it’s wisest to consult a professional when seeking financial advice as well. Especially, avoid all the noise in social media or your social circles.
Besides, I’ve also claimed before and still standing behind the idea that you shouldn’t get trading tips from finance professionals as well. They may not be transparent with their agenda unless they are responsible for managing your portfolio. You may check that piece here.
What you should seek is to learn the ideas and philosophy of these professionals, embrace their way of working, understand their strategy, and execute with their calmness.
Thus, I would like to share with you some of these ideas that have helped me most when developing my own strategy. I am expecting them to be an inspiration to you as well.
1. JL Collins — The Simple Path to Wealth
Everybody makes money when the market is rising. But what determines whether it will make you wealthy or leave you bleeding on the side of the road is what you do during the times it is collapsing (Collins, 2016).
Looking back at the history of stock markets, especially in the U.S., it’s easy to recognize the trend that is always going up in the long term. Yet, in times like the Wall Street Crash of 1929, Black Monday in 1987, the Dot-com bubble in 2000, the Financial crisis of 2007–08 and the 2020 Covid-19 stock market crash, people lose a significant sum of their net worth, some lose their nerves, and it even leads to depressions and suicides.
In times like these, it’s essential to stay calm and be ready for it. If you already know what your strategy will be in such a case, it would be easier to take the hit. Of course, nothing will make the pain of losing half your worth, but at least it may help you to come more robust out of it.
A certain amount of cash that was waiting on the side for such a scenario would help you to buy companies for cheaper. If they have not lost any of their fundamental value despite the crash, they would be waiting for you to buy, only to recover fast when the panic is over.
All the crises I’ve listed above have ended at some point, and the stock market has found its way back to new all-time highs. As long as you manage to survive, there will always be light at the end of the tunnel.
2. Benjamin Graham — Forbes Interview
“Ask yourself: If there was no market for these shares, would I be willing to have an investment in this company on these terms?” (Forbes, 1972)
The stock market that is continuously re-valuing a stock causes the price to move around where it should typically be but never stay there so the speculators can make money out of the volatility.
If you own stock from a non-public company, then the scenario is quite different. The private stock price only changes its value when the sale of the stock from a specific price takes place. So, it stays still for a long time, and it’s troublesome to track the daily share value all the time.
According to Graham, you should free your mind from the short-term price movements and evaluate a public stock as it’s a stock with no market to see if you would still be comfortable owning it without knowing its daily share price.
3. Nassim Nicholas Taleb — Fooled by Randomness
Say you own a painting you bought for $20,000, and owing to rosy conditions in the art market, it is now worth $40,000. If you owned no painting, would you still acquire it at the current price? If you would not, then you are said to be married to your position. There is no rational reason to keep a painting you would not buy at its current market rate — only an emotional investment (Taleb, 2001).
This fallacy is one of the most common mistakes investors make. If they have bought a share from low prices and it went up, they never look back to see if the stock still worths its value.
If you wouldn’t pay the current price of a stock to buy it, it’s irrational to keep holding it. When markets eventually correct themselves, these types of overvalued stocks will be the first ones to dive in.
Please don’t take it as you have to sell all your holdings. Taking even a partial profit when a stock you hold gets overvalued would at least help you to secure your initial investment. It would at least help to put your head into pillow with a peace of mind at night.
4. Roger Lowenstein — When Genius Failed
In times of trouble, markets become more closely linked, and seemingly unrelated assets rise and fall in tandem (Lowenstein, 2001).
Typically, the worth of a company should be based on its own activities. Of course, the macroeconomic factors may influence many stock prices in the same way and at the same time. Still, if this correlation reaches the extremes, and particularly if you observe absolute harmony of irrelevant assets, then the alarm bells must start ringing.
When all stocks are rising or falling together, the speculators pay less attention to the fundamentals of a company. They think more about how they can make more money by following the trend. The trend, though, may drag along many companies from their accurate valuation and create massive bubbles in the markets.
There is no secret formula to decide if an asset moved away from its real worth in sync with the rest of the market. Still, core valuation tools like P/E value, Price-to-book value, etc. may be the most useful at such times to judge unrealistic valuations.
5. John Templeton — Templeton Plan: 21 Steps to Personal Success and Real Happiness
The four most dangerous words in investing are: “This time it’s different” (Templeton, 2013).
Last but not least, we should pin Templeton’s words in our minds to avoid a false bias thru markets. Although markets are quite unpredictable, it’s impossible to ignore some patterns.
The dot-com bubble, housing bubble, cryptocurrency bubble were just some of the events many investors thought that this time it is different. They believed from the heart that only this time, the market wouldn’t stop its way back up and make them a reach person if they kept holding the already overvalued assets.
Yet such a fallacy only leads to disappointing results. If you trust your analysis and strategy, even when you face an unpredictable event, you would know what to do. Changing your plan on the go and thinking that this time it’ll be different will only lead to a catastrophe.
You but only you’re responsible for your financial future. If you depend on someone else’s opinion on it, you would most likely fail in your adventure to be a stock investor.
I want to be very specific here that I don’t mean you shouldn’t trust your financial advisor. If you don’t want the trouble of managing your capital, paying a professional to do it for you is only the right thing to do. What I mean here is to avoid investing what you hear from Twitter, your neighbor, or your taxi driver at all costs.
If you’re handling your own portfolio, avoid trading tips from others as much as possible. Instead, keep in mind the following lessons from the best minds to develop your strategy.
- Plan what you’ll be doing in case of a market crash and follow your strategy when the time comes.
- Buy a stock only if you’re comfortable owning it without knowing its daily share price.
- If you wouldn’t pay the current price of a stock you already own, it’s time to take some profit.
- If irrelevant assets start moving together, be more skeptical of the valuations of stocks.
- This time it’s no different! Don’t fall into false hopes and act accordingly.
People I’ve quoted in this piece have been successful due to their own ideas and precise execution.
If you want to invest your own hard-earned money yourself, then you must learn to think like them and develop your strategy to be successful in stock markets.
If you can’t, the best alternative is to stick with index funds and never pick your own stocks, as I’ve suggested here in one of my former pieces.
This article is originally published on Medium!
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Disclaimer: This article is provided for informational or educational purposes only and is not any form of individualized advice. Use this information at your own risk.
Collins, JL. The Simple Path to Wealth: Your road map to financial independence and a rich, free life (p. 62). jlcollinsnh.com. Kindle Edition, 2016.
Forbes, 1 Jan. 1972, p. 90.
Lowenstein, Roger. When Genius Failed: The Rise and Fall of Long Term Capital Management (p. 120). HarperCollins Publishers. Kindle Edition, 2001.
Taleb, Nassim N. Fooled by Randomness. Penguin Books Ltd. Kindle Edition, 2001.
Templeton, John. Templeton Plan: 21 Steps to Personal Success and Real Happiness. Templeton Foundation Press, 2013.