Quick guide to LONG profitsGood evening everyone!
I know many here are very busy nowadays with the schools all being back in session, and if you are like me and live in Canada, autumn begins whispering in your ear and you get that feeling like you should begin to think about wearing pants again rather than shorts, shoes rather than sandals, and that maybe you should consider getting the lawnmower ready for the offseason(or maybe even swapping the blades out and putting the snowblower on).
As always lately, there has been much talk about shorting and manipulation, along with a lot of discussion around contracts and how they will be laid out. The wonderful interviews with CEO Peter Pascali this week sure left a lot to get excited about, but also left a lot to wonder about in regards to how the contracts will play out.
It is very easy to get pulled in, and not see the forest for the trees. Share price up, share price down... Down when you feel it should be up, up when you feel it should be down......When will the contract be signed etc, etc, etc.....I want to write something that will hopefully be useful for anybody out there that is interested in making money as a long, bullish investor.
There are plenty of ways to make money on the stock market. More than I can count, and more than I even know about. I have tried many methods, and found some that work, and many that did not for me. If you want to profit from the stock market by shorting, frequently trading, using options/warrants/other derivitives, or anything outside of what I talk about here, than this post is not for you, and will likely be wasteful of your valuable time.
A BASIC strategy to profit MOST OF THE TIME using long-term buy and hold investing:
Step 1: Establish a goal
We all are here for one reason, and that is to increase our net worth by using the stock market. But first, you need to have a goal. Without a goal, people tend to give up when things get tough. Know WHY you are doing this, because you have to sacrifice a lot early on. It is not so easy as wanting a million dollars, or desiring a certain annual average return. Is it retirement? Is it a Mercedes? Is it the freedom to travel anywhere and do anything? We all want to have Jeff Bezos's bank account, but I am sure that somewhere between where we are right now and that, is a spot that would be amazing for most anyone. Got your goal figured out? Great..... Now monetize it. Figure out how much money buys that goal, be it monthly, annual, or one time dollars. Write it down, and know it.
Step 2: Contribute to your investment account regularly
Whether you get income from a job, a business, a pension, or other investments, you should be contributing to your investment acccount on a regular basis. This should be a habit. For me, it is once every single month. Maybe for you it is every 2 weeks, or every 2 months. Regardless, I recommend it be regular, and constant. How much you invest is up to you, but this is going to be one of the biggest difference makers in your returns. The more you invest, the more you stand to make. Think as if every dollar invested will become a hundred dollars for you. If you can find even an extra $50 a month, it will make an enormous difference in time. Find ways to live off of less, so you can invest more, I promise it will be worth it.
Step 3: Assemble (DO NOT BUY YET) a portfolio of 4-10 WONDERFUL companies
There are countless ways to measure and decide what is worth buying. I will not go into absolute detail here with my methods, but you should develop your own style anyways. Know that this step is what will define your success or failure as an investor. My personal stockpicking methods have changed over time, and still may change going forward. I recommend reading the following books(I've read many, but these are my favourites), and taking information from them to help you, I know they have all helped me....
Common Stocks and Uncommon Profits - Phil Fisher
The Intelligent Investor - Benjamin Graham
One up on Wall Street - Peter Lynch
100 baggers - Christopher Mayer
The Warren Buffett Way - Robert Hagstrom
It is up to you, but if you read the above books, and REALLY focus on what they teach about stockpicking, I have no doubt that you will achieve your goals. No matter what, the company's you choose should have a future instrinsic value far greater than todays market value.
Once you feel like you have 4-10 WONDERFUL companies in mind, it is time to consider buying them.
Step 4: Become an expert on each company in your portfolio.
Learn everything you can about your companies. Read about them, read their news releases. Become an expert. Instead of looking at what share prices are doing, look at what the company is doing. Make sure it is performing how it should, based upon what your criteria for an investible company is. This step is VITAL to your success.How much time did you spend deciding what Vacuum cleaner to buy,or what car to own? If you want to do this right, you really ought to become an expert, not just a buyer.
Step 5: BUY when the share price is cheap!
Sounds easy right? Hopefuly you've learned enough to understand when your company's share price is considered cheap. Because we are long,and we are talking about a 3-20 year time period of holding, you will consider the price cheap based upon where you feel it will go eventually. If you feel Pyrogenesis will be worth $20/share in 2 years, and it is $5 a share today, that is a 100% return per year.... Waiting to save an extra 10 cents per share might not be worth the time, just buy it if you feel it is cheap!
Step 6: Continue to add to your positions
Let your monthly, weekly, or quarterly investment dollars add up and use them as "dry powder" to invest when you see great deals on your wonderful companies. If you have 4 -10 companies, I promise one of them will be mindblowingly underpriced for you over the next few weeks. If not, wait a bit. Just keep investing when prices are cheap. Don't be afraid to build up cash in your investment account, there is no hurry, you will be glad the cash is there when an incredible deal comes along on a company that you KNOW is going to do great things!
Step 7: HOLD
Seriously. HOLD. DO NOT SELL. DO NOT COLLECT $200. DO NOT PASS GO. JUST HOLD.
Why? Because we know that share prices in the short term are IMPOSSIBLE to accurately predict most of the time. If they were predictable, there would be a computer program that picked stocks for you, and made millionaires of all of it's users. There isn't. Not consistently enough to work.. So we hold, and we do not sell.
Step 8: KEEP HOLDING
Warren Buffett says "The stock market is a machine that transfers money from the impatient to the patient".....Every company you buy should be a company that you feel you could walk away from for ten years and expect it to still be in business and creating business growth that entire time. Keep holding. You made a good choice with your stockpicking, so you hold. KEEP HOLDING.
Step 9: Maybe sell at a profit, but NEVER sell at a loss in the first 3 years
If your company has made money, and accomplished what you believe it could, and you feel it no longer has a high growth future ahead of it, go ahead and sell. Take profit, and invest in something else. I would argue that if this happens in the first 3 years than you are likely missing out on huge future returns, or you invested in the wrong company, but no shame, you made money. The average middle and small cap stock swings close to 50% above and below it's average price each year. If you did a good job picking stocks, there is still a high likelyhood that you will drop below your purchase price. This is normal, and part of the market. If you picked the company for the right reasons, it's share price will catch up to it eventually, and go where you predicted. PATIENCE WILL BE REWARDED.
Step 10: SELL WHEN......
Sell your position when the underlying fundamentals of your company have changed for the worse. Maybe they are failing to execute on their plans. Perhaps an unforseen paradigm shift in their business environment has changed their ability to achieve your originally predicted value. Perhaps it's been 3 years and the market still refuses to recognize their successes(in this case re-assess, don't just sell immediately). Sell when another company comes along that has a much higher ability to grow your wealth than the company you are currently invested in......Do not take this lightly though, ideally we NEVER sell, aside from taking a few dollars here and there to improve our quality of life. The best companies are the ones that continually provide an excellent return on investment over and over and over for decades.
That's it! Not too painful I hope! Hopefully this is a helpful little guide to help people understand what I believe to be the LOWEST RISK method of investing. It is highly recommended by Warren Buffett, Joel Greenblatt, Peter Lynch, Mohnish Pabrai, Charlie Munger, and MANY MANY others who have used very similar methods over the years to achieve awesome personal wealth.
Of note:
-If the share price dropping makes you seriously consider selling your position, I would argue that you are not an expert on your company, or you should not have invested in it in the first place. You MUST be in charge of this urge.
-Frequent trading(buy and sell) inside of a tax sheltered account like a TFSA can remove the ability to be tax sheltered.
-Frequent trading in a normal investment account will incur taxes on your capital gains. This adds up in a HUGE way over the years. Holding is tax friendly, selling is not.
-Short attacks, and massive negative price swings are ONLY LOOKED AT as buying opportunities.
-Because we are experts in our companies, and know the future value to be higher, we get EXCITED with low prices, as it helps us make higher returns.
-DO NOT hold too many companies. If you are not an expert in something, do not invest in it. Your highly researched BEST stock pick is much lower risk than your 7th best idea that you only know a little about right now. Stick to what you know, and you will likely never need to sell at a loss.
-NEVER EVER EVER EVER let other peoples opinions influence your buying and selling. It is all about the company, and it's fundamentals. Nothing else.
If you do this, I am sure you will have great success in the investing world in a stress free, passive, enjoyable way. It works for me, and it will work for you as well.
Cheers!