In the second of three parts on the stock market, John Lowe aka the Money Doctor gives invaluable advice and reveals the secrets of successful stock-market trading.
Stockbrokers are used to bad press: 'How many stock brokers does it take to change a light bulb? Two. One to take out the bulb and drop it, and the other to try and sell it before it crashes (knowing that it's already burned out)'.
But of all the different long-term investment options open to you nothing is likely to make you juicier profits than buying publicly quoted stocks and shares. Timing is everything and figures are quoted, of course, on the average annual return.
Some investors will have done better than the market, others less well – especially those since 2008 though virtually everything is back bar the bank shares. The key point is, however, that with planning and patience the stock market represents an incredible money making opportunity especially in terms of the meagre returns on cash deposits.
As I mentioned last week, the current ten-year BULL (rising) run – 2nd longest in the history of the stock market – already exceeds 200% in terms of growth since the last BEAR (falling).
The first question you need to consider is your overall stock market strategy. If you have sufficient capital to buy shares in a range of companies, and if you are interested in participating in the buying and selling decisions, have time and are willing to accept a certain level of risk, then I would recommend ‘direct’ investment. That is to say, buying individual company shares.
This has four clear benefits:
- You will actually own a ‘share’ of the company you are investing in.
- You will be entitled to a ‘share’ of any profits on a regular basis. This income is known as the ‘dividend’.
- You can spread your risk – and maximise your gains – by buying shares in a range (or ‘portfolio’) of companies.
- Your investment is ‘liquid’ – in other words, you can sell some or all of your shares any time you want.
You may prefer to buy index or managed funds – less accent on individualisation of stock selection and more on the 3 to 5 "lanes" of each bundle of similar risk stocks. The European Securities and Markets Authority (ESMA) is a body that defines the risk category for every stock on its database and also controls the European Rating Platform (ERP), which provides access to free, up-to-date information on credit ratings and rating outlooks of all public companies.
If there are 7 "lanes" of different risk categories, each public company has been rated and categorised for the "lane" designated by ESMA. Generally, the highest risk category would include emerging markets, technology and energy stocks, BRIC countries (Brazil Russia India & China) etc, while the lowest would include cash funds and government bonds. The lower the number the more cautious the fund.
The world’s most successful investor is Warren Buffet, who turned every $10,000 his original investors provided him with, in 1957, into more than $400 million today.
His advice to private investors is simple:
- Buy low
- Sell high
- Bet big only when you know something the others don’t
- Avoid popular fads
- Don’t trade very much as the transaction costs will kill your returns.
He concedes that it is not an easy formula to follow, especially as we all have a natural urge ‘to get busy’. Buffet is slow to invest in a share – spending years researching a company before making any decision – but once he has bought, he rarely sells.
Studying the tactics of investors like Buffet it is clear that you can dramatically increase your chances of stock market gains by following a number of simple rules.
Part three next week will reveal those rules.