One indispensable quality that sets most of the successful investors apart from the rest of the clan is the virtue of patience. Backed by research, it has been proven that the wealthiest of investors have always been the most patient ones. The most successful examples of it are Warren Buffet and George Soros.
“Everyone dreams of owning the Buffet portfolio but few have the patience.”
Warren Buffet is the best example of how patience can help you make great money in the stock market. Many people, don't know the fact that most of his wealth was created after he turned 50 from the stocks that he bought in his twenties and thirties.
You may argue that not all stocks require patience, and there have been many cases where people have made loads of money selling stocks in the short term. Such cases are either a careful analysis of a particular stock or a mere stroke of luck. Hitting such a jackpot usually, make the headlines and has propagated the misconception that investing in the short term can lead to greater wealth.
This is the reason that many investors today, look up to the stock market as a quick means of making money and have recreated a relative time scale for it. In their timeframe, the short term is measured in days, intermediate-term in weeks and long term in months.
This has changed the dynamics of the market. It is due to these impatient buying and selling habits, the market and the investor have continued to suffer a major loss.
It is true that stocks are a great means of growing your wealth. However, there are two underlying factors determining stock growth:
“Stock Growth is dependent on the Stock type and Time Frame.”
The key values in owning the right stocks involve attaching the right stock with the right timeframe.
However, before that, you need to identify what kind of investor you are and your purpose of investing.
Investing Style and Purpose of Investing
Broadly speaking, there are two types of Investors
- Aggressive Investors: High Tolerance to risk
- Conservative Investors: Low tolerance to risk
Aggressive investors share a high tolerance for risk. They generally tend to look for stocks that show a higher potential for growth. These investors are usually looking for companies that will become the next Pepsico or Google.
The companies that fit this description are usually startups that are looking for funding and stocks in manufacturing and resources. They usually don't offer dividends. It is because they are more likely to invest their profits in the expansion, advertising, marketing, research, and development, etc. Aggressive investors are also interested in small-cap companies. It is because these companies show a lot of potential to grow. The higher reward for the higher risk is the strategy that fuels the minds of aggressive investors. Small-cap stocks can be highly volatile, and it is imperative to keep a close eye on these stocks to make money.
These investors share a lower tolerance for risk. As a conservative investor, one should look for stocks that offer dividends or a steady flow of returns. Most of these stocks fall in the category of blue-chip stocks. This means investing in companies like Google, Microsoft and Berkshire Hathway. As a conservative investor, who has invested in the market for the long term, one should not be worried about day to day fluctuations of the market as blue-chip companies are strong enough to withstand the blows of the market. It is, however, vital to keep checking if these companies invest a substantial amount of their profits in research and development or the departments that promise steady growth.
In the 1990s, Kodak and Nokia were the two companies that held a great share in the market and the lives of the people. Both of the companies promised quality products to their customers. However, as the digital era took the market, the companies failed to flourish because their products could not withstand the competition. The inability of Nokia to embrace smart technology led to its fall. Similar was the case with Kodak, as it could not promise a smooth transition in the field of digital cameras.
As a person who is looking forward to invest his retirement money in the assurance of a reward, it is advisable to invest as a conservative investor. As a conservative investor, look for bluechip stocks that are actively involved in creating innovative products and are readily keeping up with the market. However, if you are a grandparent, thinking of gifting stock to your grandchild, you can use an aggressive approach. As an aggressive investor, look for a stock that promises potential and innovation.
Now, after you have identified your purpose and style of investing, it is imperative to define a timeframe.
Defining the Time Frame
- Short Term: Investment for a short term involves investing in a market for less than a year. It is important to note that all the stocks fluctuate in the short term. It is almost impossible to predict the direction of the ticker unless you have insider information. There is no perfect formula to invest and make money in the short term.
In fact, I would say that
“ Investing in the short term is speculation.”
You are putting your money in the market without giving your money any time to grow. It is highly advisable to not invest money in the market for short term and rather invest in market funds or savings accounts.
- Intermediate-Term: The intermediate-term means investing in the market for a period of two to five years. In such cases, you actually have the luxury of making your money grow. But one must think rationally. It is not possible to double or triple your money. However, there is a possibility to earn more than the interests being offered by banks.
Finance Experts say that when investing for an intermediate-term, it is advised to invest in
- Blue Chip Companies
“The name “blue chip” is coined from the game of poker in which the blue chips have the highest value.”
These companies are also known as large-cap companies include big multinationals that have been in business for a number of years. Some examples of these companies could be Pepsico, Microsoft, Apple, Berkshire Hathway.
These companies have the potential to bear the blows of the market and henceforth are one of the safest bet to put your money in. But as an intelligent investor, you should always look at the financial documents of the company to see how they are channelizing their profits.
- Check if the company is investing in Research and Development: It is vital that the companies with a base in technology and pharmaceuticals invest a substantial amount in R&D.
- Check if the Sales are growing at a rate of more than 10% every year
- Check if the profits are increasing
- Check how the company is handling its competition
- Check if the company holds a high barrier to entry
- Brand value of the company
While blue-chip companies are safe, investors should keep an eye on the market and forbid themselves from investing in blue-chip companies like the Lehman Brothers. Hence, always analyze the financial documents of the company yourself or ask your broker to do the same before investing in blue-chip stocks.
Stay Cautious. It is better to be safe than sorry.
- Investment in Defensive Stocks: Stocks can be broadly classified into two categories:
Defensive Stocks and Cyclical Stocks
Cyclical Stocks are the stocks whose growth is dependent on the condition of the overall market. The stock has a positive correlation with the market. It means that if the market is in recession, the stock will not perform well and if it is booming, it will touch the sky. These include stocks of companies that manufacture luxurious goods like cars, yachts, etc, real-estate or products that people buy when an economy is doing well.
Defensive Stocks don't have a low correlation with the market. You can think of the companies that people will keep using even if the economy is not performing well. The earnings, dividends and the stock price remain stable irrespective of the market. If you are investing in an intermediate-term, you can invest in companies that offer electricity, trade-in food, and beverages, healthcare, household, etc. This will ensure that even in an unfortunate situation when the market hits low, your money is safely making more money.
Long Term: This is my favorite kind of investment. One can consider investing for more than 5 years as a long term investment.
It has been observed that over the 10 year period, stocks bear all other financial investments such as bonds and investments.
When investing for the long term, you can look for companies that will become the next Google or Apple. However, there are certain things to be noted when aiming for this Buffer Portfolio.
- The Industry and the company growth: An industry could be defined as a sector in which a company operates. For eg: Pepsico is a company that operates in the beverage industry. If an industry is growing at a rate of 10% and the stock is growing at a rate of 15% or more for at least the last 3 years, the stock is a good fit for long-term investing.
- Check Return on Equity (ROE):
ROE = Shareholder’s Equity / Net Income
Shareholder Equity = Assets held by the company — Debt
ROE helps in determining the efficiency of the management of the company. A company with inefficient management will not be able to allocate the company’s assets to generate more profits. This will result in a lower ROE. As a general rule, one should compare the ROE of the competing companies and decide which company to invest in. If company A has ROE of 15% and company B has ROE of 18%, this means that company B is a better option to invest in. However, a stock with an ROE of less than 10% is considered poor whereas greater than 15% is preferred. Make sure the company that you invest in has ROE of more than 10% for at least for the last 3 years. Avoid companies that show an extreme case in ROE. Companies with ROE as 60% or more. This simply means that the company has inconsistent profits or excessive debt.
- Analyze the financial documents of the company: Advertisements about a company may lie but documents don't. Before investing in a company for the long-term, take a look at the financial documents of the company. Scrutinize the document to see if the company is in debt. Check if the sales and earnings are increasing at a consistent rate.
- Trailing Stops: Trailing Stops can behave as your ultimate saviour when the growth stock that you decided you invest in begins to plunge. These stocks automatically adjust accordingly with the market price saving the investor from extreme losses. Suppose, you buy a stock at $100 and place a stop-loss order at 10% below the stock price that is at $90. If the stock appreciates and the new stock price is $170, the new value of the stop-loss order is $153 (which is calculated by $170–10% of $170). If the stock begins to plunge, you may not need to worry much. As soon as the stock value hits $153, it will automatically be sold. On the other hand, you would have made a profit of 53% considering your initial investment was just $100.
A lot of investors wouldn't have lost their money in the bearish markets if they would have simply used trailing stops when placing their orders. This, in turn, brings us to the conclusion that while the fundamentals of investing have remained the same, investors still tend to lose money. The main reason being the negligence of investors for not learning from the mistakes.
Investing is a game of aligning the right stock with the right time frame.
In order to align the right stock with the right time frame, you need to be patient. So take your time, identify your purpose, style of investing and find the right stock. After that, use the ultimate virtue of patience and give it time to grow. After all, the market is designed to reward those who are patient.
This article is for informational purposes only, it should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions