The Stock Market
Why invest in stocks?
Most of the time, just spending less than what we earn will not be enough to meet your financial goals. This is why it’s important to invest our money over time and put it to work, and as such, why not choose stocks, the best possible way to reap the highest returns over time?
Even though stocks may seem alluring, this investment type is one of the most volatile and risky. In the short-term, the value of stocks can drop significantly, and with just a little bit of bad luck or bad timing, you can easily lose all of your returns. This is why it’s important to take a long-term investing approach. More on the concept of long-term investing later!
There’s never a guarantee that you will reap profits; you just have to educate yourself and assess your risk relative to the expected reward. Still, without a doubt, your money works hardest lying in stocks than in any other investment, or asset class, hands-down.
Warren Buffett's Strategy: Value Investing
Have you ever heard of Warren Buffett? He is an icon in the investing world and one of the largest proponents of a concept called value investing. In short, this is the strategy:
“Long ago, Ben Graham taught me that price is what you pay; value is what you get. Whether we’re talking about socks or stocks, I like buying quality merchandise when it is marked down.” - Warren Buffett
Value investing is focusing on buying shares of companies that are undervalued. This means that investors should only buy the stock if the price is below its intrinsic value. Essentially, the stock should be a bargain for your buck. Your decision on whether or not a stock is undervalued is based on your own fundamental analysis. As a beginner, this is objectively the best strategy to start out with.
Here’s how to get started with a value investing strategy:
Do Your Research
Diversify Your Risk
Look for Safe and Steady Returns
In the most simplest breakdown, this is how being a shareholder can reap profits over time:
Investing for the Long-Run
Individual stocks typically fluctuate wildly in prices, on a daily, weekly, monthly, and yearly basis. They are typically hard-to-predict and could vary for a wide range of reasons, such as company specific news, earnings announcements, and industry news. In fact, on the New York Stock Exchange, a typical stock could have a 40% price difference between its yearly high and low.
But still, there’s a bright side; investing towards the long-term. In spite of all the volatility and risks associated with the short-term, stocks have consistently shown the highest return of any investment type. Even through the huge market dips and crashes, the market always comes back. Generally, we will see most long-term investors generally will hold onto their stocks for an extended period of time and see the value of their stock increase. In the long-term, stocks generally outperform.
In addition to this, the power of compound interest coupled with time will be clear: the longer you invest in your stocks, the better off you will be. Time also helps to reduce the variation associated with expectations in return and will increase your likelihood of positive returns.