If you’ve seen the factual movie ‘Wolf of Wallstreet,’ then you’re probably aware that a lot of people have made a fortune on the stock market. However, can investing in shares make the average person like you and I rich?
While investing in shares can make you rich, the truth is it’s also highly unlikely. And as always, it depends on a bunch of factors. To give you an idea of how much money you could make, according to Market Watch, your average investor returns only around 4.79% per year on their money. This means that if you invest R100,000 you would only make R4,900 in return, and that’s only if you know what you’re doing.
But you hear of people getting rich from the stock market all the time, how exactly do they do it? Keep reading to find out.
How To Get Rich On The Stock Market?
Warren Buffet is one of the most successful investors in history, and his success could be attributed to these two investing rules that he always tried to follow. Follow these two rules and you’ll have more money than you’ll know what to do with.
- Rule #1: Never lose money.
- Rule #2: Never forget rule number 1.
You’re probably thinking, “yeah right, that’s easier said than done,” and yes you are right to some extent. Losing money on the stock market is easier than making money, (otherwise, everyone would be rich,) however there are some very simple guidelines you can follow to reduce the risk of losing money, guidelines that are blatantly ignored by 99% of investors.
Stick to these tips and you’ll put yourself ahead of the average investor.
NOTE: The tips mentioned below are principles from Benjamin Graham, the father of value investing. Value investing is an investing strategy where you find stocks that trade below their intrinsic value.
Buy a Company, Not a “Stock”
‘The Warren Buffet Way’ is an incredible book that made me realize the single most important rule about investing in stocks. And this is it; when you’re buying a stock, you are buying a REAL business, so treat it that way.
It’s so easy to become detached and only see stocks as little digital tickers on your laptop. But this feeling of detachment is dangerous, it stops you from taking it seriously and it pushed you to make irrational investment decisions, such as buying the stock on a hunch or because a friend said of good it is. However, To make consistent returns on stock, (piece of a company,) you need to understand the business.
Here are two ways you can understand a business better:
- Only invest in a business you understand already. For example, if you’re a Doctor, invest in a medical company. And if you’re an architect, invest in the development business.
- Choose a simple business that’s easy to understand. For example a toilet paper manufacturer or toothpaste
In either case, do your research, learn how to read financial reports, see if the company has a future, and if it’s even making money. Become interested in the industry, and then do some more research. If this sounds like too much work then rather take your money to the casino, your chances of making a small fortune will be better than buying a stock on a whim.
Never predict the price of the stock.
“Buy low sell high” they say. Sounds so simple right? When I first started investing I would study an endless amount of stock charts to try and get a sense of which way the market was going to go. I had very little success because I was predicting! Don’t make the same mistake, no one knows which way the market is going to go, it’s like the wind, it’s all over the place.
Rather find out how much the company is worth in terms of how much revenue it produces, if the current price is higher than that figure, then leave it, if it’s lower, then buy it. Don’t predict!
Never buy a hyped-up stock.
If your friends are talking about it, and it’s all over the news then chances are you’ve already missed the boat. Yes, the stock might continue to rise for some time, however, the stock price will correct itself to the company’s true value sooner or later. So don’t be that guy that buys right at the top, rather add it to your watchlist and wait for the stock price to drop patiently. Which brings me on to patience.
This saying by Warren Buffet literally puts shivers down my back because of how true it is. “The stock market is a device for transferring money from the impatient, to the patient.”
When you find a company that you’ll proudly own but its price seems to high then wait! Add it to your watch-list and be patient. It’s not uncommon for value investors to watch a company for years before it’s at a price that they’re happy with. As a small-time investor, patience is your number 1 superpower. No one is pressuring you to buy, so just sit tight and wait forthe deal to sweeten.
Learn how to value a stock properly.
Knowing what you should pay for a stock is what it all boils down to. To break it down there are two prices that a company has at any given moment.
- Stock price. One is the stock price, this is the price that you see on the stock market and it’s driven by what people think it’s worth. A simple willing buyer, willing seller scenario.
- True value or intrinsic value. The other is the stock’s true value, which is an invisible price that trends between the fluctuations of the stock price.
The reason why the stock price fluctuates above and below the true value is because of two powerful emotional triggers—fear, and greed.
When the stock price is over its true value, driven by greed, it’s too expensive. On the other hand when a stock price driven by fear is under that true value, then the stock is undervalued. During moments of fear the market puts the stock on discount, which creates a buying opportunity for us value investors. This is the essence of value investing, and it works! Now this doesn’t happen very often, however when it does you need to be ready.
Here’s the difficult part, the true value of a business isn’t something that’s on display for everyone to see. It’s up to every investor to find out what they think the true value of a company is, and this takes learning and practice.
As a starting point, I highly recommend you pick up a copy of “The Warren Buffet Way” in your local book store. They should have stock in book stores across South Africa. The book will teach you how to properly value a company the Warren Buffett way, along with some other great investment advice.