The rise of zero-commission trading platforms, robo-advisors, and other technological advancements in the financial industry have democratized access to the financial markets for individuals from all across the world.
It is now easier than ever to open a brokerage account, place a trade order, or join an investor community to and follow the latest news. The pandemic seems to have fueled the people’s interest in everything related to the fascinating world of finance.
However, people will also encounter at some point that investing in companies is not as easy as it seems. With that in mind, the following article provides a few useful tips to help our readers in improving their investing skills if they are just getting started on this journey.
The most successful investors have understood that nobody can predict with 100% accuracy what the stock market as a whole or any individual name for that matter will do in a relatively short period.
The reason for this is that there are many aspects of the market’s pricing structure that are not at all related to the financial performance of a business. However, in the long run, businesses that have performed well will see the price of their stock appreciate accordingly.
With that in mind, the best investors are those who buy and hold a company for as long as it takes until the market catches up.
Markets go up and down every year. In most cases, either they go up more days than they go down or the daily price increases are higher than the daily drops. In any case, downturns should be embraced as a natural thing by investors and the best investors grow accustomed to this reality.
If you are not willing to tolerate a 20% drop in one or many of the stocks that comprise your portfolio, then you should probably stay away from investing
Most people spend days scouting and researching the market before buying a house or any other real estate property. However, for some reason, investors often feel that a 5-minute read can be good enough to justify investing thousands of dollars in a company.
The only way to identify a great company is to study it to the point that you know all the ins and outs that affect its business and the underlying value that the market is failing to appraise.
That could take hours or days of research. So, if you plan to invest in the stock market, keep in mind that outstanding results may demand a significant amount of time invested in researching and learning more about the businesses you plan to invest in.
All investors, regardless of their expertise and background, make mistakes at some point in their career. They either buy businesses that perform as expected, they buy them at a price that was well above their intrinsic value.
Nobody is exempt from making these mistakes but everybody has the opportunity to cut their losses before it is too late. If the company’s fundamentals have deteriorated to a point that the original investment thesis is no longer feasible or it becomes obvious that the price paid for the business was too high, then it might be time to take the loss and move on.
Did you know it took Microsoft at least 16 years to reach the same price it did during the dot-com bubble of 2000?
The company was probably overvalued in 2000 but was definitely undervalued 5 and 10 years after it became obvious that MS Windows was leading the world to a whole new stage of productivity and growth.
However, it took investors more than a decade to realize the kind of gains that they were probably expecting to see from one of the world’s most successful companies.
This example teaches one valuable lesson that most successful investors understand very well: patience pays off.
If you held your Microsoft shares from January 2001 until December 2020 (19 years) your investment would have grown at a compounded annual growth rate of 11%. That is twice the gains the S&P 500 turned during that same period. That’s true. Your patience would have beat the market by a long shot!
We hope these recommendations can help you in strengthening your skills when investing in the stock market. Discipline, patience, and due diligence will help you achieve the kind of returns that you have been expecting. Stay the path and don’t stop learning.