When it comes to learning about the stock market, we firmly believe that you must have a great foundation, no matter your level of investing experience.
- Stock Market = Pendulum
The stock market is like a pendulum that swings back and forth. When you invest in stocks, you want to buy when there is pessimism and sell when there is optimism.
Many people are unsuccessful because they follow the crowd and chase investments.
It will always swing back and forth from fear to greed, a continual cycle that will never end.
The stock market is like a pendulum, forever swinging between unsustainable optimism and unjustified pessimism.
Benjamin Graham
When the stock market has fear, this will give you an excellent opportunity to buy low and sell high when there is tons of greed.
Most people are unsuccessful because they follow the crowd and buy stocks during moments of greed.
Source: Pinterest
- Recognize and Avoid Stock Market Bubbles
You should avoid stock market bubbles at all costs! A bubble is when the crowd goes wild into a particular investment, and the bubble will eventually pop.
Here are a few speculative bubble examples:
So, as a general rule of thumb, if your friend who knows nothing is telling you to buy into a particular asset, run far away! This sentiment indicates that the herd has moved into a specific investment.
In 2000, a company called pets.com was worth billions of dollars even though they barely sold any pet items. They were one of the first e-commerce stocks during the dot.com bubble.
Bubbles will create a great opportunity once the bubble pops. Bitcoin soared to $18,000 in 2017 during the Bitcoin bubble.
However, it got down to as low as $3,000. If you had purchased Bitcoin at those levels, you could have sold it when it got up to $64,000 in 2021.
- Dollar Cost Averaging
Many investors try to time the market based on their emotions and trends. However, people have yet to determine what the market will do in the short term.
The best thing to do is dollar cost average, which means to spread your investments out over time.
For example, if you were going to invest $12,000 into one stock, you could invest $1,000 on the 15th of each month for a year.
This investment would allow you to get the market average over a year.
If you can invest at the complete bottom of the market, I recommend doing that. However, this is a tricky thing to do.
Source: Investopedia
- Understand Share Price Value
When looking at a stock, you should check out the market cap, not the price. Behind every stock is a business with an intrinsic value.
As you learn more about investing, you should have a formula for finding true value.
Basic logic would tell us that a $10 stock is cheap compared to a $1,000 stock.
This logic is false, and it all comes down to the amount of outstanding shares.
Apple stock is worth $175, and Chipotle stock is $1,706.
However, Apple is worth 2.3 trillion, while Chipotle is worth $47 billion.
Market capitalization = outstanding shares * share price.
The formula above will tell you what the market is giving as a value for a particular company, which changes with every trading day. Some are worth millions, some are worth billions, and some are worth hundreds of billions. Few companies are trillion-dollar market cap companies.
- Understand Tax Advantages
A significant tax advantage is associated with being a long-term investor versus a short-term trader.
Short-term capital gains (1 to 365 days) tax as ordinary income, the highest rate.
On the other hand, long-term capital gains (366 days or more) are taxed at a lower rate, saving you as much as 20% depending on what tax bracket you fall into.
On top of that, dividend income tax is only 15%.
You can read more about capital gains and tax rates on the IRS website and apply them to your income tax bracket situation.
- Ignore The Noise
Noise is everywhere in the stock market.
If you are always keeping up with the latest drama, you will eventually end up making horrible investment decisions.
When investing in stocks, you need to make emotionless decisions.
My best piece of advice to you, therefore, is to turn off the talking heads! Formulate your own well-researched opinions and sleep easy at night. Don’t let noise impact your investing decisions.
You should check on your stocks once a week, depending on your investments.
You should also keep track of the significant company announcements, quarterly earnings reports, and annual reports. Beyond that, the rest is just noise.
