How to Become Rich with The Stock Market

vemuda.com - It’s undeniable that shocking events may be the order of the day on Wall Street, especially now with what’s going on in the world.

Nonetheless, many have walked this same path and found for themselves a golden stream of wealth that keeps nourishing their fat purse every split second.

Most notably of all is Warren Buffet, the oracle of Omaha, with a net worth of $72.5 billion. What’s intriguing to me is that a whopping 84% of all stocks owned by Americans belong to the wealthier 10% of the population.

To distil this a little further, a whopping 38% of that 10% shareholding belongs to the wealthiest 1%.

And according to Goldman Sachs, this holding amount’s to $21.4 trillion in public and private stocks, so clearly the 1% holds a significant portion of their wealth in stocks, this tells us that investing in stocks plays a prominent role in creating wealth.

However, if you’re clueless about stock investing, or how to make money on the stock market, then the best way you can achieve success is to glean tactics from savvy investors and market pundits.

Source: unsplash.com by Oren Elbaz

In today's post, we will look at tactics and strategies used by savvy investors to become rich in the stock market while at the same learn ways to avert possible mistakes that can make us lose thousands or possibly millions.

So let’s get into it.

Strategy #1: Think decades and not days

Investing is a long term game and the gurus of the industry now this very well. Warren Buffett said, “Only buy something that you’d be perfectly happy to hold if the market shut down for 10 years.”

So, having a long-term mindset is fundamental if you're looking to grow wealth with stocks. It takes patience and time.

Charlie Munger said, “the big money is not in the buying or selling, but in the waiting.”

If you decide to withdraw or sell your investments at an early stage, or at every sign of a market downturn, you might be caught up in an unfortunate experience.

Whenever the market takes a downturn, and stock prices start rapidly falling, instinctively – most people will start selling their stocks.

Including the guys who tells just about everyone they are “long term investors”, they’re usually one of the first people to sell.

Most people are easily swayed by an endless variety of factors such as something they saw on TV, heard at a cocktail party, read in a newspaper, a magazine article, or spotted in a newsletter.

And not surprisingly these factors persuade them into buying too high or selling too low. But I don’t blame them because I would do the exact same thing (if I didn’t know any better) it’s the logical thing to do.

If someone told me that a tsunami or a hurricane was going to hit my house, I would want to run away as fast as I can. And stocks are not different.

Instinctively, it’s human nature to run away from danger, and it’s the same with a crashing stock, you would be crazy to want to run into a burning house.

But can I tell you all a little secret, that’s actually the best time to buy, or to put it in another way “run into the house” if you will.

Warren Buffett said “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”

However, here’s the caveat, in some instances, it is actually wiser to walk away, and sell, then to hold or run into a fire.

One way to avoid the urge of running out too soon is for you to invest at an early age, in low-risk, steady growth stocks and allow compounding to do its magic.

For example; a 25-year-old who makes a one-time investment of $10,000 into an index fund assuming an annual 8.7% growth return will have by the time he retires at age 65, have $281,307 to his name.

However, if a 35-year-old makes a one-time investment of the same amount $10,000 into the same investment, at age 65 when he retires, he’ll have $122,147 to his name.

Now let’s take a look at this example.

Julia after her graduation lands a job which pays $3,500 in monthly salary. She makes sure she saves $1,000 per month and invests this through the same index fund, earning a yearly return of 8.7%.

She is 22 years old right now and plans to make regular monthly investments until her retirement at the age of 65 years old.

If she continues to stay true to her investment strategy, putting $1000 into an index fund, in 25 years she will become a millionaire at the age of 47.

If she keeps at it, investing $1000, in another 18 years before she reaches her retirement age of 65, she would have accumulated another $4.68 million.

Therefore, at the age of 65, Julia’s investments would be worth an astronomical value of $5.68 million.

Strategy #2: Low risk, steady growth

After accepting that a long term investing strategy is the way to go, the next step is to pick stocks to form a portfolio.

Most often when investors are choosing which stocks to put into their portfolio, they are often enticed with stocks that have outperformed the market in the past. But this isn’t always the wisest move.

Warren Buffett said “If past history was all that is needed to play the game of money, the richest people would be librarians.”

Unfortunately, change, fluctuation, and volatility are terms that describe the nature of the stock market. Stocks that soared like an eagle in the past few years can be brought to the dust in a flinch of a second.

Although past performance of a stock is imperative when you want to build your portfolio, you wouldn't want to bet your money on some low performing stock unless you have keen sight for value investing like the Oracle himself; Warren Buffet.

If you are willing to accumulate wealth over time, investing in a healthy growing company is vital because they grow your money over time.

Companies that are actively growing can help increase your wealth in a sporadic geometric progression or in a lesser arithmetic progression.

But, what is more, important is that they will always thirst for growth. The more they grow, the more your stock wealth compounds.

So, if you’re asking yourself, how do you recognize these companies if you want to purchase their stocks?

The wrong way is for you to listen to alluring and seductive stories of stocks in Wall Street from salesmen. The right way is to evaluate companies' research patterns that are assessed by stock analysts.

This will help you evaluate if the stocks have growth potential. For example, stock analysts that release the outcome of research have an incentive to be cautious in their assessments.

If they make high estimates and the stock disappoints, they can lose their jobs. If they make low estimates and the stock outperforms their predictions, they still keep their jobs.

So, a pattern of upward earnings revision by a stock analyst is an impressive sign that a company is growing.

Analysts are always reluctant to raise earnings estimates, so when they do it’s another good signal.

Another important factor you should consider is the company's growth in sales. A company that consistently increases the number of products sold, or services rendered, has positive growth potential. This will eventually translate to stock growth.

However, you should be cautions of companies that realized revenue and sales growth because they raised prices of their products rather than creating more markets for their products or services.

Strategy #3: Diversify your portfolio

One of the key fundamentals you should play close attention to when you’re building your stock portfolio is to make sure you diversify your stocks.

Diversifying your portfolio is one of the best ways to secure your investment and at the same time ensure that your portfolio is still growing. Here’s why, whichever stocks you choose to invest in, it won’t always be on an upward trend.

Sometimes they might be on a downward trend and start losing you money. However, if your portfolio is diversified such that you have investments in, let’s say for example; Tech, healthcare, mining, aviation and retail.

If your retail and aviation stocks aren’t doing so well, but your tech, healthcare, and mining stocks are doing well, these stocks should offset the losses and ensure that your portfolio is still growing.

You can also diversify and offset potential losses by investing in assets that have a negative correlation with stock. One renounced asset class in this category is Gold. And it's available to trade in the derivative markets.

When you are picking your growth stocks you can adopt these strategies to shield your portfolio from straightforward market risk by picking stocks that will move in opposite directions and cancel out fatal market moves.

Strategy #4: Don't fall in love

Surprisingly, falling in love with stocks is actually a real thing, investors tend to fall in love with stocks that have consistently paid dividend, grown in value and made them lots of money. However, don’t say I didn’t warn you when she, eventually, breaks your heart.

The market is volatile, always changing and always fluctuating, some days and years are great, others not so much.

Stocks that may have regularly delivered profits in the past might not follow the same trend in the future.

It’s a mistake to assume that a stock will consistently keep churning out profits, even when it’s obviously been going down for a while, but you’re holding onto it, in the hopes that it’ll rebound.

It’s a mistake fall in love with a stock. The numbers and only the numbers should dictate your investment decisions.

Strategy #5: Preserve your stocks

Preservation methods are ways you can use to insulate against loss, hold your profit, and mitigate risk. There are two major methods used by savvy investors.

The first method is known as the Call Option. Generally, this is in the form of a contract that you can buy. Its advantage is that it gives you the right but not the obligation to buy a specified quantity of a security at a specified price within a fixed period.

Whenever you exercise this right by activating the call option within the specified time, the seller of the stock must sell to you the agreed upon stocks at the predetermined price.

When you buy a call option you will be able to preserve your cash and gain more profit especially if you have a strong conviction that the price of the stock will rise in the future.

The second method, the put option is more preservative in nature. This contract gives you the ability but not the obligation to sell a stock at a particular price within a specified time frame.

The stock buy options are often activated in times of market downturn to protect your stock from fall below the price specified in the contract.

In this case, you can be guaranteed that you will receive the strike price of the stock even when the stock is worthless.

So in conclusion, you should always remember the basics that to become rich require a mix of patience and perseverance. It’s a long-term game that requires diligence, diversification, and preservation.

Your emotions should never sway you to flirt with hastily, un-matured decisions. But, rather you should always set your eyes on the end goal.

Thank you guys so much for reading. With that said, I’ll see you all in the next one.