The secrets of the stock market are unwritten, unspoken & to a lot of small investors like ourselves… Unknown. I am not talking about legal requirements of investors, I’m talking about the rules that successful investors live by.
The stock market lures investors in with the thought of big money. But making big money in the stock market is not easy, and most fail. You need to be disciplined, focused, and patience, but it also takes a great deal of knowledge surrounding business finance.
Despite your experience or capability, you can still do what most don’t… Make a solid strategy that follows the set of rules used by the most successful investors in the world.
Although this is not a formula to wealth, when used correctly these rules can propel your investing career decades into the future.
20 Rules to Success in the Stock Market
#1. Avoid the Herd Mentality
Everyone has daily decisions based on popularity… What’s the most popular TV? What’s the most popular phone? What’s the most popular car?
Unfortunately when it comes to stocks, the herd can influence you badly. If everyone around is investing in the same particular stock, there is a tendency for other investors to copy. But this strategy is will backfire in the long run.
The only thing the herd mentality does is drive share prices up, normally above the real value of the company. This, in turn can cause a bubble to form, which will eventually pop. One example of this Bitcoin… The price of Bitcoin got out of hand due to masses of people plunging money into it. After the bubble burst, it left people thousands of dollars worse off.
This is not to say you should avoid seeing what others are doing. But you should also do your own investigation before buying any shares… You don’t want to overpay for an underperforming stock.
#2. Only Make Informed Decisions
Proper investigation and research should never be taking lightly, but a lot of investors neglect it.
Either the investor doesn’t know how to do proper research, or they are too lazy. Investors generally go for the name of the company, and the brand size as an indication of a good investment. I’m here to tell you this is wrong.
Big companies do not always perform in the stock market. Only when you know the in’s and out’s of a company’s financials, business model, management team, and future goals can you make an informed decision on the security of your investment.
#3. Never Try to Time the Market
Timing the market is impossible, no one can do it. Even Warren Buffett believes people who try and time the market, are wasting other opportunities.
Watching stock prices of specific companies and waiting for the right price is not the same as timing the market. People who try and time the market are waiting for huge spikes in share price, so they can cash out on short term trades.
With this strategy, no matter which technique you use, or which news station you listen to, the chances of making money are 50/50. If you stick to regular deposits in a solid portfolio, you chances increase dramatically.
Even Anil Chopra, director of Bajaj Capital think… “Nobody has ever timed the market successfully and consistently over multiple business or stock market cycles”. If no one so far has been able to crack the code, how do you expect to?
#4. Follow a Disciplined Investment Strategy
Throughout the last 100 years, we have seen bullish movements in the market, followed by bouts of panic moments. The volatility experienced during the markets dips and corrections have seen investors lose massive amounts of money, despite the big bull runs.
However, investors who are disciplined, and follow a strict set of procedures generate higher returns than those who panic buy & sell.
Systematically investing money in well researched stocks, then having patience to hold true to your strategy pays off in the long run. Small corrections, or times of volatility will not affect your long term investment goals.
As I mentioned, the market is in constant swing, but for 100 years, the bulls have come out on top. Leading investors to buy more in times of depression, and sell at times of peak prices.
#5. Check your Emotions at the Door
Many investors lose money by trading through emotion. If you have a losing stock, your emotion is hold until it rebounds… Sometimes they don’t, so you’re better off selling.
Fear and greed are the two emotions you need to be aware of. The lure of companies on the way up can lead to over excitement, normally this leads to an investor risking more than planned for. Greed has taken into a place of no return… Either your risk will pay off, or you’ll be stuck with unwanted stock in a failing position.
Fear on the other hand, can do the opposite to an investors portfolio. When prices fall, everyone can admit to thinking “get out now”… But falling prices can be an opportunity. If you are confident in your research, and you realise the potential of the company, falling prices should never frighten you… Good companies bounce back, so hold onto them.
Finally, you need to think with your head, not your heart. If a company looks bad, it probably is… Your gut is a good tool, but only when backed-up with facts.
#6. Only Invest Money you can Afford to Lose
You can only risk money you have in excess, if you start gambling funds you need you could find yourself in a very sticky situation.
Not to say you won’t make money with your investments, you could produce massive gains… But if the worst happens and you lose that money, you will have no safety blanket to pay your bills, which is not good.
People think a good way to get around this is by using margin, or getting a loan. Both are the same thing. Margin is a loan from your broker, so you can invest with more money than you actually have… This is very scary loan to accept, because if you lose this money, not only will you have spent your savings, you will also have to pay the broker back… Plus interest.
The last thing I would do is take margin from a broker, betting with money you don’t have is a recipe for disaster.
Background on Margin
Margin is what brokers offer to investors to trade with more than they can afford. Usually it will be on a 1-to-2 or 1-to-3 basis, meaning you would invest 2 or 3 times the amount in your account.
I have seen some sketchy brokers offer up to 1-to-30 margin accounts, so if you have $1,000, they will give you 30 times that amount to trade with… But if you lose the money, you will have to pay it back with interest.
#7. Have Realistic Expectations
Hoping for the best is never a bad thing… But when evaluating your plan, or setting a goal, you need to be realistic.
You might have read that Warren Buffett or Charlie Munger made 50% returns this year. Then you might think that will be your target for next year. However, just because they made 50% returns, doesn’t mean you will be able to.
The big wigs on Wall Street make returns that seem unrealistic because of the capital they have available, and the manpower behind the research teams. Us, as sole proprietors cannot expect to compete with the high level Wall Street boys.
Warren Buffet has stated, “If you earn more than 12% per year in stocks… It’s dumb luck”. The stock market is a volatile place of business which no one can accurately predict.
If you expect to earn more than 12% each year, you are setting yourself up for disappointment. The S&P 500 returns around 7% per year, this is a good benchmark to set your goal from.
#8. Don’t Fear Corrections, Expect Them
A stock market correction is always around the corner. But you can’t predict when they will strike.
Usually they will follow a massive national or even global event, but they can also come from slight uncertainty within the market. It will always hurt your pride when you see the numbers drop, but don’t let it discourage you.
Over the last 100 years, we have seen market corrections, crashes, and even shutdowns. But the market has always recovered, and for the most part, came back stronger.
Corrections are an opportunity to buy more shares of solid stock at an undervalued price. So don’t be afraid of corrections, prepare for them.
#9. Buy Businesses, Not Stock Symbols
You can’t just look for cheap stocks to buy, you need to buy the business that fuels the stock. Cheap stocks, don’t mean cheap businesses… Cheap stocks, mean bad businesses.
Spotting a good business is quite difficult, but heres a basic breakdown of what to look for:
- It is ran by trustworthy people with good core values, and a strong growth plan.
- The company brand is well known and respected.
- It has plans to continue trading for extended periods of time.
- The stock price has fallen or is considered undervalued through the use of an intrinsic value calculator.
Don’t focus on the stock price, as some good companies such as AT&T trade at around $30 per share, whereas others such as Amazon trade at over $2,000 per share. It is a matter of perspective, good companies can be cheap.
#10. Diversity Doesn’t Guarantee Results
Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.
It is a good idea to diversify your portfolio in line with your risk level. Buying from multiple industries, possibly from multiple countries. However being to diverse can impact your return.
The more diverse your portfolio, the more likely you are to mimic the average market return. If you hand pick a few companies that you believe will do well, you are more likely to beat the market, hence beating inflation.
The final thing to consider is… Diversification won’t protect you from reckless and uninformed investments.
#11. Never Think Short Term
5 years is the minimum length of time you should think about holding a stock. Unless something drastic changes the value of the company, you should not sell until you either hit your target price, or you are ready to retire.
People like Warren Buffett and Michael Burry have been able to build huge wealth by investing long term. Using the power of compound interest to turn small positions in growing companies, to huge sums of cash.
Long term investors can increase investment value with dividends & consistent deposits used to boost share hold, which then are boosted by asset appreciation, building your account passively throughout time.
#12. Share Price Doesn’t Mean Value
Company value and share price are two different things. Similar to the tip above about buying good businesses, you don’t want to buy overvalued stocks.
Using intrinsic value as described above, you can tell whether a company a fairly valued or not. Overvalued stocks are never a good idea to get into, Wall Street is very unpredictable when it comes to correcting overvalued companies.
Just because a company has previously increased share price in the past, doesn’t mean it will again. Only if a company is undervalued with a past of high value is it a good idea to consider investing.
#13. Don’t Spend all your Cash
You might think holding cash is a waste, especially when stocks can return 8% in one day and cash returns 8% in one year. However, holding some cash can be a good choice.
If you don’t like what the market is doing, or you can’t find a good investment for your portfolio, hold onto your cash.
It takes character to sit and wait until the right moment, there is no sense in going after mediocre opportunities and missing the big one when it comes along because you don’t have any case.
#14. Hoping is Not a Strategy
You should be making we studied investments, then be patient with them. Accept the reality of the stock market, especially when it’s harsh, you need to be confident in your decisions, and if all you have is hope… You can’t be confident.
#15. Nobody Made Money Panicking
Stress leads to panic… If you follow the rules, you will do very well in the stock market. There is no reason for stress.
Your financial status will impact how much stress you will feel when investing in the market. Which is why I encourage you to get ready before investing, consolidate your debt, build up a savings account, then get going.
If you have no excess cash in your savings account, you are more likely to sell at a loss, or before your true profit can be realised.
You can always make your money back, if you lose it. But if you make one split decision through anxiety, your mindset will never recover. So avoiding stress in the stock market is key to your investing mindset.
#16. Don’t Forget ETF’s
ETF’s are a great way to hedge your investment to reduce risk. They might not be the most lucrative form of investment, but they are easy ways to grow wealth without much work.
Following ETF’s that match the S&P 500 or the FTSE 100 are great ways to gage the overall market and underlying economy, as well as highlighting major industries that are outperforming the market.
ETF’s also offer dividends and asset appreciation, which can boost your earnings in your portfolio.
#17. Read Everything you can Get
Online news sites, blogs like this, investing books… Everything readable that you can get your hands on, you should read it.
Financial news companies are not like the everyday 6pm prime time news channels, they only state facts to help the public understand the market and the overall economy. They are great tools that can be used for investment ideas.
As well as blogs and investing books, you can learn a great deal from people that have spent lifetimes on Wall Street. I wouldn’t go to blogs for stock tips, but if there is something you want to learn, or analysis of a company, that is the place to search.
#18. Explain your Picks
Act as if you are a hedge fund manager who has to explain your stock picks to investors. This will put you under some pressure to actually understand why you have chosen the companies you have.
Is the company developing new tech? Is it growing its dividend? Or is it merged into a new industry? These are some of questions you can ask yourself. What you don’t want to say is… It looks good.
The investors in your fund will want more information than.. It looks good. They will want reassurance that you actually know what you are doing.
#19. There’s Always Something Going Up
If you look hard enough, there is always a bull market going on somewhere. That’s why I say to hold your cash for the right opportunity.
Even during the 2008 crisis something was going up, you just needed to look… Even though the S&P 500 lost over 35% of its value, companies like Hasbro, Ross Stores, and Walmart all grow over 10% during the year 2008.
It isn’t easy to find good companies in a depression, but it can be done.
#20. Don’t Buy All at Once
I want you to employ the tactic of dollar-cost averaging. The act of buying small amounts of stock using regular deposits to lower your cost per share.
The idea is, that when the share price increases, your regular deposit of say $100, will not be able to buy as many shares. But, when the share price decreases you will be able to buy more with your money. Hence you are buying more shares at a lower price.
This is not only a good way to buy stocks from a share price point of view, but it is a good way to set regular intervals to evaluate your positions.
A deposit once per month should action you to re-evaluate the companies you are investing in. Check new updates, financial statements, and developments within the company. A good opportunity to test your analysis skills as well.
Develop Some Rules of Your Own
You probably won’t follow every rule on this list, and I don’t expect you to. But you should look at the rules and see what makes sense to you, and what you want to change.
Only you can invest like yourself… Sounds like something from a college party I know, but it’s true.
So… You need to look at your investing style, analyse how you research stocks, and make a set of rules that only you can follow.
Don’t Overthink It
Even though there are a lot of ways an investment can go wrong if you do everything right, it’s obviously out of your control… So don’t overthink it.
When you hit a loser, it’s ok. Everyone has losers, you just need to have a quick look at what went wrong. If you can’t determine why this company went up the wall, strike it off and forget about it. You can still learn from a loser, even if you don’t know why it nosedived.
Your mental capacity and emotional strength will thrive after cutting a company loose. Knowing that you failed, but then fought back and picked another makes a massive impact to your investing attitude. In life, business and finance, the same rule applied throughout… Giving up is the only certain way to fail.