Investing in stock markets is all about knowing where to invest, when to invest, for how long to invest and when to sell.
But as simple as it sounds, these questions require a lot of effort, skill and time to be answered correctly and more importantly, profitably. After all, when you are investing in stock markets, you want to earn profits and create wealth. Isn’t it?
If you really want to know how to invest in stocks profitably, then understanding these four time-tested ground rules of the markets would greatly help:
1st – Never Ignore Fundamentals
Stock market is best suited for long term investors.
But failing to realize that, thousands of investors want to make quick profits and get rich overnight. But unfortunately, in trying to do that they end up overlooking fundamentals that really matter. Like how good is the business (operationally and financially), how is it being run, is the management capable and trustworthy, future prospects of the business, etc.
A stock might be quoting higher than its intrinsic value but sooner or later, the stock price will align itself to the actual value of the business. Hence, one should never ignore the fundamentals.
2nd- It’s Impossible to Predict Market movements in Short Term
Irrespective of what experts tell you, there is no way to correctly predict the movement of stocks in the short term.
There are just too many factors and variables that impact prices in near term. However in the long term, the business fundamentals take over and stock prices adjust to reflect actual business realities.
So you should not worry about the daily price fluctuations or what markets will be doing over the next week, month or even a year. You don’t check the value of your real estate properties daily. So why do it with your stocks?
Instead, direct all your efforts towards finding stocks of fundamentally sound businesses that are available at reasonable valuations. That is all that matters when it comes to successful investing.
3rd- Learn to go Against the Crowd
Think about it. If everyone in market did the same thing, then do you think all of them will make money?
The answer is NO and there is enough proof for that.
Generally what happens is that investors buy stocks that everyone else is buying, assuming that the stock must be a good one and worth buying (since everybody is buying – band wagon effect). Result? Since the stocks are neither properly researched nor bought at the right price, investors end up making losses.
Smart investors know that they can make money in markets only when they buy something that is out of favor (i.e. against the crowd), but which has a good chance of recovering. This is how to invest in stocks successfully.
4th- Focus only on Long Term
If all the claims about money doubling overnight (in short term trading) were true, everyone would have been rich by now. but that is not the case.
Most successful investors have made use of the fundamental truth – in equity investing, chances of succeeding are higher with a long-term mindset rather than a short-term one.
Equity as an asset class has outperformed all other asset classes and historical data proves that it can easily give average returns of 12-15% on an annual basis but this is when you remain invested for sufficient periods of time.