It is no secret that investors sometimes tie up too much money in stocks, putting themselves at risk of losing a significant portion of their wealth if the market plunges. Then again, other investors place little or no money in stocks, and therefore miss out on excellent opportunities to grow their wealth. Investors should make stocks a part of their portfolios, but the operative word is part. You should only let stocks take up a portion of your money. A disciplined investor also has money in bank accounts, bonds, and other assets that offer growth or income opportunities. Diversification is key to minimizing risk.
Those who trade too often, focus on irrelevant data points, or try to predict the unpredictable are likely to encounter some unpleasant surprises when investing. By keeping it simple and focusing on companies with economic moats, requiring a margin of safety when buying, and investing with a long-term horizon you can greatly enhance your odds of success.
Are you getting into stocks with the expectation that quick riches soon await? Unless you are extremely lucky, you will not double your money in the first year investing in stocks. Such returns generally cannot be achieved unless you take on a great deal of risk by, for instance, buying extensively on margin or taking a flier on a chancy security. At this point, you have crossed the line from investing into speculating.
Though stocks have historically been the highest-return asset class, this still means returns in the 10-12 percent range. These returns have also come with a great deal of volatility. If you don’t have the proper expectations for the returns and volatility you will experience when investing in stocks, irrational behavior taking on exorbitant risk in ‘get rich quick’ strategies, trading too much, swearing off stocks forever because of a short-term loss may ensue.
In the short term, stocks tend to be volatile, bouncing around every which way on the back of Mr. Market’s knee-jerk reactions to news as it hits. Trying to predict the market’s short-term movements is not only impossible, it’s maddening. It is helpful to remember what Benjamin Graham said: In the short run, the market is like a voting machine tallying up which firms are popular and unpopular. But in the long run, the market is like a weighing machine assessing the substance of a company.
Yet all too many investors are still focused on the popularity contests that happen every day, and then grow frustrated as the stocks of their companie which may have sound and growing businesses do not move. Be patient, and keep your focus on a company’s fundamental performance. In time, the market will recognize and properly value the cash flows that your businesses produce.
There are many media outlets competing for investors’ attention, and most of them center on presenting and justifying daily price movements of various markets. This means lots of pricesstock prices, oil prices, money prices, frozen orange juice concentrate prices accompanied by lots of guesses about why prices changed. Unfortunately, the price changes rarely represent any real change in value. Rather, they merely represent volatility, which is inherent to any open market. Tuning out this noise will not only give you more time, it will help you focus on what’s important to your investing success the performance of the companies you own.
Likewise, just as you won’t become a better baseball player by just staring at statistical sheets, your investing skills will not improve by only looking at stock prices or charts. Athletes improve by practicing and hitting the gym; investors improve by getting to know more about their companies and the world around them.
Stocks are not merely things to be traded, they represent ownership interests in companies. If you are buying businesses, it makes sense to act like a business owner. This means reading and analyzing financial statements on a regular basis, weighing the competitive strengths of businesses, making predictions about future trends, as well as having conviction and not acting impulsively.
Whether you’re already in stocks or you’re looking to get into stocks, you need to find out about how much money you can afford to invest in stocks. No matter what you hope to accomplish with your stock investing plan, the first step a budding investor should take is figuring out how much you own and how much you owe. To do this, prepare and review your personal balance heet. A balance sheet is simply a list of your assets, your liabilities, and what each item is currently worth so you can arrive at your net worth. Your net worth is total assets minus total liabilities. I know that these terms sound like accounting mumbo jumbo, but knowing your net worth is important to your future financial success, so just do it.
Composing your balance sheet is simple. Pull out a pencil and a piece of paper. For the computer savvy, a spreadsheet software program accomplishes the same task. Gather all your financial documents, such as bank and brokerage statements and other such paperwork you need figures from these documents. Update your balance sheet at least once a year to monitor your financial progress.
A second document to prepare is an income statement. An income statement lists your total income and your total expenses to find out how well you are doing. If your total income is greater than your total expenses, then you have net income. If your total expenses meet or exceed your total income, then that’s not good. You better look into increasing your income or decreasing your expenses. You want to get to the point that you have net income so that you can use that money to fund your stock purchases.
Your personal balance sheet is really no different from balance sheets that giant companies prepare. In fact, the more you find out about your own balance sheet, the easier it is to understand the balance sheet of companies in which you’re seeking to invest.