If you are intimidated by stock investing, rest assured you are not alone. Many investors feel overwhelmed by the prospect of trying to invest in individual stocks. They are worried that they will make mistakes that will cost them their hard-earned savings. Some have even gotten burned by stocks tips that have resulted in massive losses. Indeed, many view the stock market as a casino and are not willing to put capital at risk.
However, successful investing is not as hard as you might think. You do not need superior intellect or be a math genius to be a good investor. What you do need is a level of emotional stability and a set of key principles to guide you in your decisions. To quote Warren Buffett, “If you are in the investment business and have an IQ of 150, sell 30 points to someone else. You do have to have an emotional stability and an inner peace about your decisions.”
At Value Invest Asia, our mission is to help investors make informed decisions when investing in Asia. We have found that these five rules have made all the difference in helping individual retail investors navigate the stock market. Remember, successful investing is about building your wealth in a safe and sustainable manner for a lifetime.
1. Be comfortable with market volatility
As an investor, you need to accept that market volatility is a feature of the stock market. Indeed, the superior returns you get from investing in stocks come at a cost: enduring the inevitable ups and downs in the overall market and the share prices of the companies you select.
The stock market as a whole goes through downturns more often than one may realize. On average, you can expect a 10% drop in the stock market a little more than once per year. And you may see the overall market decline 20% or more roughly every four or five years. And once every decade or so, you will have to endure a gut-wrenching 30% fall. Stock prices of individual companies can be even more volatile, falling over 50% at any given time.
If you are not prepared for market volatility, then you will be tempted to sell the first time you experience a big drop. Selling at the bottom is the costliest mistake an investor could ever make. Hence, you must have confidence that the stock market will eventually rebound and go on to make new highs.
2. Build a portfolio of individual stocks over time
Most investors would do well to buy a low-cost index fund and allocate their efforts elsewhere. For them, merely matching the market would be good enough. However, if you want market-beating returns, you would need to select and own individual stocks.
No investing process is perfect. Hence, to manage risks, investors should carefully build a diversified portfolio of at least 15-20 stocks. Over time, you will find that a few of your stocks will break away from the pack — the 80:20 rule predicts that roughly 20% of your holdings will generate 80% of your returns. But it is impossible to foresee with absolute certainty which stocks will be big winners. Hence, owning a portfolio of stocks increases the chances you will capture the companies that can produce life-changing returns.
3. Commit to being a Long-Term Investor
Despite what the stock market wants us to think, we cannot measure a company’s success over a single quarter or year. Look back at the best companies in the stock market and you will find that it takes time for them to execute their winning business strategies and achieve full potential. It can also take a while for a company’s stock price to reflect the success of its business. Peter Lynch puts it succinctly, “The typical big winner in the Lynch portfolio (I continue to pick my share of losers, too!) generally takes three to ten year or more to play out”.
Yes, you can be lucky and grab a quick 10%, 20%, or even 50% gain in the short run on a stock. But that pales in comparison to multiplying your money 10, 20, or 50 times. Holding positions for at least three to five years is what it takes to deliver those kinds of stunning returns, not trading in and out of stocks. Take note, the first rule of compounding is to never interrupt it unnecessarily.
4. When in doubt, add to your winners
A lot of investors get obsessed with finding the next great stock. Often, they fail to realise that the best stock to buy might well be the one you already own. We have found that many winning stocks just keep on winning. Therefore, a great reminder is to not neglect the companies in which you had enough faith to invest in at least once.
When all is said and done, the biggest losers in your portfolio may not be the stocks that lost the most value, but the mega-winners you sold too early. And while beaten-down stocks do sometimes bounce back, they may not necessarily become the big winners that will drive your overall performance.
5. Never stop investing
The best investors do not just buy stocks once and then let them ride. They save money over time and keep investing regularly.
Having cash available gives you more flexibility in how you invest. When you have good ideas, you can quickly put the new money to work. Otherwise, you can let that cash accumulate so that you are ready to pounce on good opportunities when they arise. Furthermore, having a cash cushion provides portfolio stability in volatile market conditions. Indeed, the mental stability that cash offers can make it easier to stick to your overall investing strategy.
Our simple approach to timing the market? We do not even try to predict it. We accept that the stock market will rise or fall routinely but given enough time, the market converts from a voting machine into a weighing machine.
In summary, learn and have fun along the way
Whether you are a brand-new investor or have been looking at stocks for years, we are confident that you can take your investing to the next level by following these five simple rules. As investing is a lifelong process, we hope that you will continue to sharpen your skills as you progress towards your financial goals. We are certain that when you look back, it will be the most fun and fruitful journey!
An accountant by training, F.I.R.E 2030 is a student of value investing since 2012. She believes that successful investing requires discipline and patience. But with the right knowledge and temperament, ordinary investors can achieve extraordinary results. These articles are her journals on stocks and the investing journey toward financial freedom in 2030.