One of the most common questions I have been asked in my 33 years of being involved in finance is, “what do you think of the market?” Basically, this translates into, “should I buy now?” Humans have a natural inclination to own things for a variety of reasons, including status and achievement, a sense of security, control and independence, emotional attachment, and self-expression. These reasons help explain why people enjoy owning things and why owning things can be a source of satisfaction and happiness.
Predicting the stock market is a challenge many investors face as stock prices can be influenced by a wide range of factors, including economic indicators, company-specific events, and market sentiment. The trouble is that the stock market as a whole also goes down and can stay down for lengths of time. This can be very tough for some to understand and those people end up throwing in the towel.
Determine the start of a move-up in the stock market and whatever you own will rise. A rising tide lifts all boats. Or does it, and should you be even thinking about market direction?
Most regular people are usually confused by investing in the stock market. “It’s mysterious, or it’s something only smart people do. Nothing to do with me,” they say. Yet, people invest every day in their lives. The great investor Peter Lynch once said, “People spend more time and effort to buy the right refrigerator than they do to buy the right funds.” Probably true. How long did you look at the range of products on offer, the reviews, the reliability, and the price for the value when you considered and finally purchased that item? Moreover, the bigger the item, the more time you’ll probably research it, right? After your purchase turned out to be great, you will probably be telling all your friends too. Right? Investing in companies is no different. Yet the foolish investor is allured to stocks based on a quick profit by thinking he can do a little work and gain huge rewards. Nothing can be farther from the truth, no matter what fantastic story you want to buy into.
What you must remember about the stock market is that everyone you meet wins and, honestly, nobody loses. We are all extremely wealthy individuals and if you could have a tiny piece of our knowledge, you may (and by this I mean “may”) be able to share in our fantastic lives. Again, a total fallacy. Most people lose in the market, but it just never seems like that. There is an air of superiority when you shout about your winners. Just don’t ask about the losers. Get it?
Having said this, people use the market as a barometer for buying individual companies. Owning a company can be more lucrative and provide more control over one’s investments compared to investing in the larger market. Direct ownership, control over your investment, diversification, and potential for higher returns are all factors to consider. On the other hand, investing in stock markets involves buying shares of publicly traded companies and holding onto them with the hope of realizing a profit through capital appreciation or dividends. They are much more prone to influence from macro factors too. Future events are beyond our control. Reactions of the markets are unknown, we are bad at the evaluation of macro risks, we always have to be correct guessing them, and finally, the noise has very little impact on long-term company profits.
Having said that, here are 5 keys to unlocking value in your investments that are not highlighted very often.
Emotion Is Your Worst Enemy
Emotion will kill you as an investment driver. The stock market doesn’t care about what you think and feel. It cares even less when your feelings are at their greatest. Emotions can play a significant role in investing, and it’s not uncommon for investors to make decisions based on fear, greed, or hope. For example, fear of losing money can lead to indecision or selling at the wrong time, while greed can drive people to make impulsive or risky investments. On the other hand, hope can be a powerful motivator that leads people to hold on to investments for too long, even when the market is not performing well. It’s important for investors to be aware of their emotions and how they might impact their investment decisions. To avoid making emotional decisions, some investors follow a systematic approach, such as dollar-cost averaging or following a set of rules, to stay focused on their long-term investment goals. Try to separate emotion from the facts and ultimately your risk process, which includes profit taking. Take less guidance of direction from the media. Remember, bad news sells and the media will influence your buying decisions of companies by giving you direction advice on the market. Ignore it. They are there to sell headlines.
Never Invest On A Tip From A Friend Or Something You’ve Heard
Investing based on a tip from a friend or acquaintance can be tempting, but it’s important to approach these recommendations with caution. While your friend may have good intentions, they may not have a thorough understanding of the investment, the market, or your personal financial situation. Additionally, investing based solely on a tip can be a form of speculation, which is when you invest in an asset with the hope of making a quick profit, rather than with a long-term strategy. Before investing based on a tip, it’s important to do your own research and due diligence. This may include reading up on the company, the industry, and the financial metrics that are relevant to the investment. You should also consider your investment goals, risk tolerance, and overall portfolio diversification. Ultimately, the decision to invest based on a tip should be based on a thorough understanding of the investment, your personal financial situation, and a well-thought-out investment strategy. Remember that there’s always a risk of losing money when investing, and it’s important to be prepared for this possibility.
As Mike Tyson said, “Everyone has a plan until they are punched in the face.” Consequently, everyone is a long-term investor until the market turns sour. When you go to invest in a company, think of it more than just a price. Think of it, for example, like a house. It’s your hard-earned cash; your money will be tied up for 10 years and you will be an owner and will need to keep looking at it to see if it needs attention. You’ll be surprised that your analysis will take a new meaning and angle. In reality, value may be realized a lot sooner than you think, so there is no shame in taking early profits should it come to that.
When it comes to long-term investing, patience and discipline are key. It’s important to avoid making emotional decisions and sticking to your investment strategy, even when the market experiences ups and downs. Additionally, it’s a good idea to regularly review your portfolio and adjust as necessary to ensure that it continues to align with your investment goals. Keep in mind that while long-term investing can provide several benefits, it’s not a guarantee of success, and there is always a risk of losing money.
Don’t Concern Yourself With The Market, But The Company
Focusing on the outlook for individual companies rather than the general market is a common approach among successful investors. This approach recognizes that stock prices are primarily driven by the financial performance and prospects of the underlying companies, rather than broader market trends. By carefully analyzing individual stocks, investors can identify companies with strong financials, solid growth prospects, and attractive valuations. This can help them to make informed investment decisions and avoid the potential pitfalls of market timing, where investors try to buy and sell at the right time to capitalize on market trends. In all my years, I have known very few people who are consistent at market timing (lets just say no one).
I am a big contrarian at heart. I often like to take the opposite view to the masses where I believe I have an edge over them. Contrarian investing is a strategy that involves taking a contrary approach to the prevailing market sentiment by investing in assets that are out of favor or undervalued. The idea behind this strategy is that the market is often driven by emotions and can be inefficient, leading to mispricing that can be exploited by a contrarian investor. These investors believe that by taking a contrarian approach and buying assets that are undervalued, they can benefit from a rebound in the market as investors eventually realize the true value of the asset. Additionally, contrarian investing can help to reduce the overall risk of a portfolio by investing in assets that are less correlated with the overall market.
Lastly, if you’ve chosen your cheap stock, and if you have an analytical edge and a behavioral one, see if you can identify any events on the horizon that could possibly move the price to value. These “catalyst” events are something my firm analyses as a business and provides analysis to individuals and larger money managers.
Check in if you like this style of thinking and want to know more.