5 Tips Every Investor Needs to Know in 2020
March 10, 2020
Investing in the stock market is something anyone can do. However, the challenge with investing is knowing which companies to allocate your funds to. There is no “secret formula” to investing nor is there an easy way to make quick cash with stocks, leaving many to be disoriented. Fortunately, there are some principles that have been proven to work for some of the greatest investors in the world.
Here are five tips every investor needs to know in 2020:
1. Invest in Industries You Understand
Peter Lynch once said, “Never invest in any idea you can't illustrate with a crayon.”
In other words, conduct research on a business before buying their stock and ensure you have a firm grasp of their fundamentals. Understand how they generate income, their performance compared to its competition, and potential for future growth.
If it takes an unreasonable amount of time to understand the core concept of a company, move on.
2. Desire Dividends
Dividends are a portion of a companies profits that are paid to shareholders.
Investing in companies that have a long history of paying dividends, especially those that have raised them over time can create an ongoing income stream within your portfolio. If a company is able to pay dividends regularly, it often demonstrates they are financially well.
3. Price Does Not Equate to Value
Everyone loves bargains and pay less than what they value the product. The main goal of stock investing is to buy low and to sell them when they appreciate and one way to do this is to look for stocks you believe to be undervalued. At times, stock prices may have no connection to the intrinsic value of a company over the long-term.
One way to find the intrinsic value of a company is to research a company’s fundamentals from the last few years. Study their record of debt, profit margins, and returns on equity. Then, compare the company to competitors and determine if they have any outstanding qualities that will garner abiding success.
If a company has great fundamentals and is undervalued compared to its peers, it may be a good time to invest.
4. Hold onto Your Investments
A common question many people have is “when should I sell my investments?”
Phil Fisher’s simple answer is: “if the job has been correctly done when a common stock is purchased, the time to sell is almost never.”
Great investments should withstand the test of time and increase in value in the long term. If you focus on establishing a concentrated portfolio of thriving companies, you should be able to hold onto your shares for a very long time.
Moreover, constantly buying and selling can be hurtful to returns, due to commissions and taxes.
It may best to reduce your number of transactions and increase the amount of time you hold onto a stock. However, if a company has changed its fundamentals from when you had initially invested, a re-evaluation is warranted as it may be preferable to sell.
5. Distinguish Between News and Noise
In economics, the 80-20 rule or the “Pareto Principle” is an aphorism that states 80% of outcomes are a result of 20% of causes for a given event. This rule simply means that most events are caused by only a few factors.
Applying this rule to investing, most news may not accurately reflect the potential success of a company.
Pay attention to news that will truly affect your company’s potential earnings and disregard anything minor. If the company is well established, it is likely that small dips in their stock prices will be temporary.
What to Take Away
Becoming a shareholder means becoming a joint owner in a company, so it is imperative that you make smart choices. Understand how the company operates and watch if they have a history of paying dividends. Keep in mind stock prices do not necessarily indicate the "real value" and sometimes investing when others are selling may be the right move. Once you have done your research and made quality investments, hold them for as long as the fundamentals remain constant. Following these tips will make you a savvier investor in the unpredictable realm of the stock market.
Disclaimer: If specific securities are mentioned they are for illustrative purposes only and such mention shall not be seen as a recommendation to buy and/or sell. None of the opinions expressed by Voleo or participating guests should be construed as investment advice. Securities offered through Voleo USA, Inc. Member of the Financial Industry Regulatory Authority (FINRA), Securities Investor Protection Corporation (SIPC). Security products are not FDIC insured, not bank guaranteed, and will fluctuate in value. We do not solicit, recommend, or offer investment advice. Voleo USA, Inc. is a wholly owned subsidiary of Voleo, Inc.