Investing in the stock market is something people do only when they decide they are comfortable with a certain amount of risk…risk that could pay off with massive returns. But what turns most people away from investing is the volatility and the uncertainty that your hard-earned money will come back to you.
After all, seeing your life’s savings disappear into thin air is not for the faint-hearted.Almost as many have lost fortunes on the market as have created them.
So, how does one go about creating wealth and protecting capital in this uncertain venture?
Most experts would agree that the most successful investors are the ones who have the most discipline….
Picking a strategy and sticking to it no matter how bad things get is often the hallmark of a great investor. By the very nature of the market you may see your investments increase and decrease in value very unpredictably.
The difference between amateur and professional investors is having the stomach to deal with losses.
Warren Buffett, one of the most successful investors alive, has himself seen a couple market crashes during his career and is known for saying things like, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.” So, keeping your cool and treating market crashes as a buying opportunity is essential for success on the market.
Though there are never any guarantees when you put your money in the market, there are some tried and true strategies that put you in a better position to profit from your risk.
Growth investing is part of what people call investing on fundamentals. The fundamental characteristics of a business, such as its fair value, expected growth rate and sales is considered in a calculation to figure out the “fair price” for a stock. This fair price depends on the growth potential of the underlying business.
Growth investing is fantastic for people who want to generate better than average returns overall by investing in companies with a great potential for future earnings.
Value investing is very similar to growth investing, with some major differences. Value investing is focused on the underlying value of a business.
Basically, the “fair value” is determined by what the whole company would be worth if you were to buy it today. This is adjusted for present values since any money you pay today is for growth or income over many, many years.
So, a simple calculation gives you the intrinsic value for each stock of the company you’ve been analyzing. Now, the stock is bought whenever it is trading at a “discount” to this intrinsic value. That means that if you believe a stock is worth $100 and it’s quoting at $80 on the market, you should buy it. When the price of the stock either approaches $100 or exceeds it, you must sell and book in the profit.
Notice how stocks are bought for less than they are worth. This is the secret behind value investing, and Warren Buffett himself is an ardent value investor. This approach separates price from value while investing and is a widely accepted method used by millions of investors around the world.
This one’s for the techies. If you consider yourself a numbers person or a heavy-duty geek, this is the method that may appeal to you most. Technical analysis requires mathematical calculations that look at a stock’s price, its volumes and other factors to try and predict future movements.
Many times technical analysis focuses on the chart of the stock’s prices. The method involves looking for patterns created in the chart to determine the market’s sentiments at any given point of time. If you think people are behaving anxiously and the market will fall, sell. If, based on the data, you think the market is likely to become optimistic in the near future, buy.
One strategy for stock market investing that has been gaining traction over the past few years is momentum investing. It is very similar to technical analysis – think of a snowball getting bigger as it rolls down a mountain. The further it has to fall,the bigger and faster it gets; that’s momentum in action.
The theory goes that stocks moving at high speeds are more likely to burst and appreciate in value very quickly and should therefore be bought as soon as possible.
What You Should Pick
Each strategy described above has a group of ardent followers and you can be sure to find successful investors in each category.
Different professional investors swear by different strategies and there is very little evidence or research to show that one strategy is better than the other by a wide margin. So, pick the strategy you’re most comfortable using on your own dollars and cents.
Just be sure to stick with it for the long haul as trading and investing strategies all require discipline and commitment. As many have learned the hard way, switching strategies too often is a sure way to lose money on the market.
About the Author: Andrew May is a Chicago hedge fund attorney and the practice he founded, May Law, specializes in financial and business law. Andrew is also committed to educating people to help them avoid legal issues and frequently shares his expertise through guest blogs on a variety of online publications. To learn more, visit http://www.mayLaw.com.