2020 has probably been the weirdest year that we’ve been through and that’s the reason why I want to show the beginners how to invest more wisely. I feel sorry for those new investors out there who are just getting into the stock market because it’s very hard to navigate these dodgy waters if you do not know what you are doing.
I want to provide a framework that is going to help you steer through these interesting times without getting burned. It’s not going to make you an investing genius just after one article but what it will do is get you on the right pathway to investing well during volatile times. I’m going to share with you 2 tips that I use as Buffett uses the best investors, uses them to beat other investors and wins long term. Let’s get straight into it.
Know How To Invest In Your Emotions
The factor that separates the average investors from the quality investors during these times is those who can handle emotions. Here’s an analogy. Jordan Peterson advises that we be the reliable ones at a relative’s funeral. It’s important that we take that advice further and we relate it to investing, particularly investing in and after a market crash. You say this is the mindset that 90 percent of investors take on. When they see their stocks go up, they feel very happy. They go tell their friends at the bar how much money they’ve made, check their stocks weekly, if not daily. Their emotions are all caught up in the ups and downs of the stock markets.
However, the small percentage of investors that do the best are the ones who do the opposite of what those guys do. The investors that win actually happy when their stocks go down because it means they can buy more at a cheap price. Over the long term, they know the cheaper the price that they buy into stocks, the higher their returns will be. It’s because of this exact concept their Buffett says you’re dealing with a lot of silly people in the marketplace. It’s like a great big casino and everyone else is boozing. Buy low, sell high. Unfortunately, most investors do the opposite.
Choose An Area That You Are Competent In
If you want an advantage over other investors, if you want to be getting those high-level returns, you need to be investing in areas that you know well. So what I recommend is you take a step back and you assess the areas that you do know. If you’re a young guy, it might be gaming, artificial intelligence, social media, some type of technology business if you’re older.
Your advantage might be in businesses that are more mature, perhaps hospitality, travel, wine, food, you know, something along with that nature buffet. He only sticks to those more mature business models that he knows well, the likes of See’s Candy, which sells sweet products. That business model has been around for ages, and Buffett understands it’s all the likes of insurance, which Buffet put many hours into getting his head around. He knows their game so well that he can pick the companies that are good investments. And you should be doing the exact same thing as Buffett.
As I mentioned, if you’re new and want to know how to invest, you probably have a better idea than most of what companies are going to lead in the future and what industries will take off. That’s why one of Peter Lynch’s most famous quotes is so simple but so genius. He says, know what you own and know why you own it. Most investors want to make money in every industry. They want to talk at the bar to their friends about all of the companies that they own. But rarely do they stick to the industries that they know well. Rarely do they understand exactly what it is they own and why they own it. That’s why you shouldn’t be like most investors.
If I just got a random person who’d never played poker before and I said, do you want to join me and my friends for a game of poker, we’ll each put in five hundred dollars. That person will be stupid if he said yes to the game because it never played before and he was going to get creamed and lose money. And if we take that and apply it to the stock markets, you would be amazed at how many beginner investors don’t actually know the basics to make an investment. And what inevitably happens is they get creamed after one, two, or three years.
If you’re new to this game of investing in the stock market, particularly in these risky times. Twenty, twenty. Here are some basics you need to know. The PE ratio is one of the most important metrics to know, basically measures how much you pay for a stock relative to how much it’s bringing in. Another thing, return on equity, is a great metric for measuring how efficient a business is at generating profits. Do you know about stock market orders? What a limit order as a market order? A stop-limit order? You need to know these things before learn how to invest. How is your understanding of a range of different fundamental strategies that you can use, a.k.a. Warren Buffett, the strategy of value investing, buying at a price below intrinsic value.
The dividend Aristocrat Strategy Group of stocks that you can dollar-cost averaging two and beat the market long term, at least according to history? It’s important you get your head around these fundamental strategies, these little tactics that you can use, get your head around the PE ratios before you become an investor. This is one of the simplest rules to invest in, but one of the hardest rules to follow. Most investors are obsessed with the day-to-day, week-to-week news of the stock market because receiving a piece of news gives us get some type of dopamine. This leaves 90 percent of investors hooked on the short-term going on of the stock market. It does truly have a negative effect on the way we invest and ultimately our investing returns.
One of the problems of looking at the very short term is you don’t notice the long-term patterns that you are going through. If you look at a week or even a month and the stock markets, these are normally tiny dots of a longer-term pattern that is happening. So as an investor, if you are attached to the short term, you’re going to make decisions based on that. And overall, it leads to worse investing returns. This is why Buffett says only buy something that you’d be perfectly happy to hold if the market shut down for 10 years. Don’t worry about the everyday news and don’t worry about the minutia.
Now, the next thing that you really want to be getting your head around is market cycles, especially in 2020 when we’re in the later stages of the cycle. Now, what I’m talking about is getting to know what stocks do well in which period. Let me share with you a bit of an old-school graph that will help you do so. So as you can see during the early to middle stages of the market cycle, the likes of transportation, technology, and capital goods stocks tend to do well. Why? Because things are starting to expand. The economy is starting to heat up. So transportation is more required. Technology stocks are normally selling for a song during these times and they can take off big a.k.a. if you invested a Netflix, Tesla, Amazon 10 years ago was the time to do so just when the market was starting to heat up.
However, during the later stages of the cycle, the more conservative stocks start to work better the likes of consumer noncyclical and health care. So why is that? Well, because even in a market downturn, people still need to eat. They need toothpaste, soap, clean water, etc. So consumer noncyclical are safer to own. They also need their health taken care of. So health care stocks during the latter stages also work well. And this is what I’m talking about as a beginner entering into the stock markets. You need to be getting your head around these things, know what stocks do well and when. As the saying goes, you can buy the strongest stock in the world, but if it’s in a weak sector, you can lose.
So if you’re a beginner investor, obviously, I’m sure you wish you started 10 years ago when the economy in the market was in the early stages. But at the end of the day, or you can focus on is the market conditions that we are currently in, and these little tips that I’ve shared with you are going to help you navigate the waters for these unique market conditions in 2020. And going forward, I wish you the best of luck, everyone, and I hope you can get those high investing returns.