Last week I discussed why the stock market, despite its being manic depressive, is still on top of my list for long-term investment. (link) A lot of readers were surprised to find out that returns from the stock market beat the returns from prime real estate properties.
Growing your money in the stock market is easy in principle but difficult in practice. It’s because we are subjected to a lot of emotional forces. It is no different from maintaining a healthy lifestyle – the mind is willing but the body is weak. And this is true about saving in general. We all know it but only a small fraction of the population adheres to it. Below are some thoughts I wish to share with you to make your stock market investing more successful.
1. Understand the stock market. It is the avenue where we can all participate in the ownership of the listed companies. This facility that allows us to buy and sell stocks with ease anytime during trading hours also goes with a “price.” We see the stock prices go up and down like crazy every second, something that does not happen in other asset classes. To borrow from Benjamin Graham in his classic The Intelligent Investor Mr. Market (the allegory he used to describe the market) is manic-depressive – moody, euphoric, emotional, irrational, and exaggerated. That is why he said that in the short-term, the stock market is a voting machine but in the long-term it’s a weighing machine – i.e. in the long run the stocks with value are the ones that will bring you the returns.
2. Understand yourself. Know your own temperament. Does the stock market excite you? Or are you having problems sleeping at night just because the value of your investment fluctuates? If you are anything like Mr. Market, seeing him everyday may drive you nuts. You have to design a way to profit from the market without sacrificing your health and sanity. You may be better off with equity funds. Go for the automated ones so you don’t even have to bother doing the investing on a regular basis while you reap the rewards of cost averaging. (Cost averaging is a system of investing periodically a specific amount of money, allowing you to buy more shares when the market is down and less when the market is high.)
3. You don’t need to beat the market in order to profit from it. This is the battle cry of John C. Bogle, the father of index funds. In fact, he says that you are better off with low-cost index funds. One of his suggestions that may be useful to people who can’t take market fluctuations is “Don’t peak! Don’t peak! Don’t peak!”Bogle swears by this strategy because it spares you the stress and gives you a pleasant surprise at the end.
4. Be realistic with your expectations of the market. Never forget that there is risk involved in any type of investing. It is foolish to believe that the market could continuously rise without any pullbacks. That is why it is also good to read books like Irrational Exuberance by Robert Shiller (father of Behavioral Finance and 2013 Nobel Prize awardee in Economics) so we are reminded to be more calm and rational in our investing.
5. Everyone needs to have long-term investments. I notice that when people hear 10 or more years, they lose interest just because of this wrong notion of losing control, not being able to touch their money. I know some who have been asking me about investing in stocks for years now but are stymied by the fear of losing control and decided to keep all their money in the so-called “safe” investments. I guess the question that they should ask now is, “How much have I lost because of this delay in action?” Even retirees should still have stock investments. We are living longer lives now so a 60 year old still has decades to invest some of his money in stocks.
6. Who’s the better businessman? To those who would rather start up a business or partner with a relative or friend in order to augment income, remember that there is a high mortality rate for start-up businesses. Unless you’re really passionate about a business because you’re good at it and/or you love to do it not just for the money, then you’re better off just being a passive investor of the taipans in our country.
7. The market’s manic-depressive characteristic is not all that negative. The dips give us a chance to accumulate more stocks, while the sudden surges brought about by irrational exuberance allow us to take some profits.
8. Number 7 can bring about lots of profits to the shrewd traders. Stories of quick profits lure a lot of people into this deadly trap. Traders beware! There are only very few successful traders who make more profits than losses. And I would dare say that most of them probably own the brokerage firms they trade with, so all commissions go to the same pocket. When I say investing in the stock market is for EVERYONE, I do not mean active trading. Despite what some people claim, not a single person in the world knows what the market will do in the short run. No one can predict the actions of a manic-depressive, remember? Warren Buffet acknowledges this and that is one of the reasons why he’s the world’s greatest investor. But if your idol is Jesse Livermore, the legendary trader known as the “Big Bear of Wall Street,” think again. Livermore committed suicide, one of his wives shot their son, their life was extremely exciting but troubled, you can only wish it’s a movie you’re watching and not the life you’re living. So please be careful in picking your life pegs.
9. If you need to, find a safe way to satisfy your need for adrenalin rush. It’s innate in us to want some excitement in the things that we do and that’s one of the reasons why we see a lot of investors, even the newbies, engage in active trading. I suggest you just limit this activity to the amount you’re willing to lose. Maybe you can color code your stocks – blue for blue chip stocks which you will hold until retirement; green for your medium-term hold stocks, these could be the up and coming new stocks with good promise of becoming blue chip in the future; red – your speculative stocks from which you want to make a quick buck. The red should be a miniscule portion of your stock investments. Chances are, you will get tired and realize that the additional earnings you make from your red stocks are not worth the stress that you get when your trade turns sour. Hopefully, wisdom will come upon you that the successful investors are the ones who do the “boring” things of following the process, choosing the “boring” but reliable stocks, and just holding on for the long-term.
10. Watch your portfolio. Periodically check your portfolio. Different stages in life call for different asset allocations. Have the right mix of fixed and equity investments depending on your age and needs. While you’re young and as soon as you’ve fulfilled your emergency fund, protection fund, etc. your best bet for long term returns are stocks. Here’s my husband’s explanation to a niece why she should invest in stocks: An ounce of gold will always be an ounce of gold. A parcel of land will always be a parcel of land. But a blue chip company today will not be same anymore. It will grow and be much more than what it is today if handled well.
11. It’s more of psychology than finance. In the end, what’s more important is having the right attitude towards investing. Acknowledge your personal weaknesses vis-à-vis the market’s own short-term irrationality and be focused on your goals.
I hope that my lengthy discussion why stocks are my favorite asset class for long-term investment will move you to action. Investing in the stock market is for everyone.
Despite all the calamities we’ve encountered, our economy is sound and is geared for progress. Our companies are growing and earning more. Let’s all profit from this growth and in the process prepare for our own bright future.
This article is also published in PhilStar.com.
Attributions: Photo by the author with silhouette images from thebullandbeartavern.com.