The Stock Market: What You Need to Know.
An investing guide for life.
The democratisation of the stock market is a new and fantastic advancement of our financial markets. But sadly, it’s brought a lot of stupidity into the game. I’m here to show that individual investors can win just as much as any established expert in the stock market.
Look at all the richest people in the world. An overwhelming majority of those achieved those riches through equity — equity is ownership. So, if you want to be on that list then you have two options; either create your own equity or buy a piece of someone else’s.
If you wish to create your own equity then you need to build a company — like Bill Gates, Elon Musk or Jeff Bezos. If this isn’t your destiny then you can buy your way into equity through strategically investing — like Warren Buffet, Peter Lynch or Ray Dalio. Now I say strategic investing, but anyone can do this. Seriously, anyone.
It’s actually extremely simple and every single principle is gained from empirical data that tells us how we need to invest to bring about the greatest possible returns. Following this article, you should be equipped with all the knowledge you need to thrive in the stock market.
History Does Repeat Itself.
Here is everything you need to know:
- The S&P 500 has brought average annual returns of 10% over the past 100 years
- A market correction happens, on average, every single 16 months
- A bear market happens, on average, every single 3.6 years
- Bull follow bears
Now let’s discuss what all that means. First of all, the S&P 500 is simply the top 500 companies publicly listed in the US stock market. A market correction is when the market drops 10% or more. A bear market is when the market drops 20% or more. A bull market is when the market rises 20% or more. Nearly every single bear market has been followed by a bull.
This really is all you need to know. The S&P 5500 brings average annual returns of 10% over a long period of time. So, invest all the money you can when you can into the S&P 500, and invest more when in a bear market — the stocks are on sale. Buy! Buy! Buy!
Annual returns of 10% are more than enough to make you incredibly wealthy — have a play around with this investment calculator and see how long before you could be a millionaire. Simply put, investing constantly, consistently and passively is the key to winning in the stock market.
Principles.
Buy and Hold
The longer you can make your time horizon the better this strategy works. If you have a time horizon of anything less than a decade then you will either lose money or not make any. When I say buy and hold, I really mean it. Hold for at least 40 years. But the longer, the better.
Drop FOMO
When you think and act hastily you lose. Just because everyone else is buying GME doesn’t mean you should. As Buffet put it; ‘be fearful when others are greedy, and greedy when others are fearful.’
Be Patient
You need to be extremely patient in the stock market — you might not see returns for the first decade. And that’s fine! You’ve got plenty of time. You should not be selling any stock and therefore you should not be worried about the price. You only actually lose when you sell at a loss.
When You Spend You Lose Potential Earnings As Well
When you buy things, you don’t just lose the money that the item cost — you also lose any potential money that the initial capital could have made you. When you spend £200 on a night out, you haven’t just lost £200. You’ve lost £23,478.17.
Stop buying dumb shit.
Passive Investing Wins
This strategy is passive investing. We’re not talking about day-trading here; that’s gambling. Don’t gamble with stocks. Passive investing over a lifetime is truly the way to win. It’s a proven way to gain wealth and one that is definitely getting lost in the noise of investors today.
Forget Diversification
Don’t take my word for it. Do your own research. I’ve studied the likes of Buffet and Dalio and I’ve come to my own conclusion that diversification is not a good investing strategy. Diversification is good to cover the short-term losses of certain asset classes.
For example, the S&P 500 enters a bear market (drops by 20% or more) but at the same time, you also have property investments that soar — covering the loss of the stock market. My answer is, why? Why does it matter that the stock market is down? Why does it matter that your hypothetical net-worth isn’t as high as it was? It only matters if you plan on selling, which I do not.
Thus, the way I say see — all diversification does it cause your average returns to be lower.
Again, Buffet put it best (I’m paraphrasing) — ‘if you have a list of your top 10 stocks, you’re not going to care about the number 10 stock as much as you do number 1 stock. So why bother putting money into number 10 at all? Put it into number 1.’
Never Deviate From Your Investing Strategy
Pick one strategy, get very good at it and do not deviate. When you try to do things outside your realm of expertise you will lose money. Stick to what you know, get rich slow.
Don’t Be Obsessive
When you look at the price of your stocks every day then you will start to act rashly when it comes to buying and selling. Don’t. The price of the stock does not matter as no matter what you’re going to keep buying more and you’re not going to sell either. Just buy it and leave it.
You Can’t Predict Anything
So don’t bother trying. Yes, corrections and bear markets do follow patterns, but this does not mean you should try to predict a crash so you can sell at the top and buy at the bottom. You will lose. You will miss some of the best days of the stock market — greatly reducing your returns. Just be happy with your 10% returns — you don’t need any more than that.
Don’t Keep Cash
Accounting for inflation — sitting cash will decrease in value. This is the primary reason that you can’t save yourself from wealth. Sitting cash is never a good thing. You should have some liquidity in order to cover a personal crisis, but never sit on too much cash. Get that cash working for you.
We’ve discussed a lot. But really this is the blueprint that you need for the stock market. It seems to be good to be true but it really is. To make it a hat-trick, Buffet said it best in a response to Bezos.
Bezos: ‘Warren, your investing strategy is so simple. Why doesn’t everyone just copy you?’
Buffet: ‘Because nobody wants to get rich slow’
Investing passively in the S&P 500 will bring you 10% returns. That will make you very wealthy. Follow the principles outlined and you can do very well in the stock market.
