One of my mentors, Warren Buffett, has a great quote:
“Rule 1: Don’t lose money. Rule 2: Don’t forget Rule 1.”
In other words, don’t be risky with your investment.
When it comes to making money in the stock market, protection is key. Yes, there are many ways to lose money with stocks…
(I should know, I’ve made some big mistakes that cost me $100K…but that’s a story for another day.)
…But that doesn’t mean that stock market investing needs to be risky. In fact, good investing minimises risk as much as possible!
As I always to say, profit is a byproduct of good risk management. Properly preserving your money is the fastest path to a profitable investment.
Here are 5 secrets to staying worry-free while making money in the stock market:
1. See your Portfolio as a Whole
A lot of people, when they see an exciting opportunity, put too much money into that one stock. All their focus and concentration and investment is in one place…which is a very high-risk situation. If your old “golden” stock goes bad, then you’re in real trouble.
A successful investor always views the portfolio as a whole — rather than focusing on one single investment. That’s why I always recommend that people have tiny “position sizes” — the percentage of your overall portfolio that’s dedicated to any one particular stock. We only invest up to 1% at a time into a new stock. If it’s doing well, you can scale this to 3-5% over time. But I never recommend investing more than 5% of your portfolio into any one stock!
Tiny position sizes mean that even if one stock doesn’t go well, the rest will still be okay. It’s not just smart financial strategy, it also helps you sleep better at night, knowing your entire wealth isn’t connected to just one stock.
No investment should ever make you or break you. It’s many investments over time that make you quite wealthy.
2. Know What to Avoid
When it comes to stocks, most people try to find the winners. But in actual fact, it’s more important to avoid the losers.
Once you do that, the winners are easier to find.
Here’s something that will probably surprise you…
More than 99% of the stocks available out there actually aren’t financially strong companies. So it’s more about zoning on the 0.5% or 1% that actually make the cut and just focusing your attention on that.
That’s why our Stock Checklist is so important. If you follow the 4 steps inside your copy of the checklist guide, you’ll remove about 98-99% of stocks out there that don’t fulfil our financial criteria so you can focus on the 1-2% of stocks that have the potential to provide healthy returns over time.
Once you’ve weeded out 99% of what I call “lemon” companies, you’ll be able to choose only the financially strongest stocks to invest in.
3. Know How to Value a Company
If a house is worth $200,000 and someone gave you an opportunity to buy it for $300,000, would you take it?
Of course not, because that’s $100,000 more than it’s worth! Yet, in the stock market, everybody’s happy to do it because they have no idea how to value stocks.
Valuation is a key skill of risk-managed investing. There are so many companies that have a lot of buzz or fame so we think they’re good investments but in actual fact, they won’t make you any money.
Yes, it might be a good company, but if it’s way overvalued, (i.e., Netflix) you shouldn’t be buying it.
Once you know how to value a company, you know what it’s worth…and then you can buy undervalued stock for a great price. That’s basically Warren Buffett’s success strategy in a nutshell!
I advise my clients that if a good stock drops in price, they should buy more shares. Most people get scared and panic sell when a stock’s price drops…where we buy more when we see a good stock at bargain prices.
Money is made when you BUY, not when you sell. If you buy at a good price, profit is almost guaranteed. So you always want to make sure you buy a stock that is priced fairly or, even better, undervalued.
If you’d like a quick rough guide to tell whether a company is expensive or not, check out this post here.
4. Understand the Big Picture of the Market
The stock market doesn’t operate in a bubble. World events, politics, and many other factors have a big effect on what happens inside the market.
To be a successful investor or trader, you need to look beyond the stock market itself to understand what’s happening in the bigger picture.
And I’ll be honest:
There are certain times that you should not be investing or trading at all.
When a Global Financial Crisis is happening, for example, you shouldn’t be investing.
An experienced investor accepts that and is comfortable hitting “pause” on their investment strategy when necessary. It’s the only way to preserve your investments as much as possible during turbulent times.
Sitting out and doing nothing is also a strategic position!
5. Master your Psychology
This is the secret that almost everyone underestimates!
Being in control of your emotions is one of the most important factors of being a successful investor and trader.
I always say: “Don’t focus on the dollar, focus on the percentage, because the percentage detaches the emotion from it.”
If you make 5%, great. Or if you lose 5%, it’s no big deal.
But if you make or lose $10,000, suddenly excitement or fear comes into the equation. Thinking in dollar terms inevitably connects your thoughts and emotions to what you can buy with that money. Emotions will almost always lead you astray and cause you to make risky and silly decisions.
That’s why I talk about having tiny position sizes.
Those positions, because they’re so small, help you be robotic about your money management. If you make money, there’s no emotional excitement. And if you lose money, there’s no real emotional depression.
Eliminating emotions helps you maintain clear-headedness…so you don’t tank your long-term strategy on temporary feelings.
One of the many benefits of our Stock Checklist is to rationally evaluate stock opportunities. If you haven’t already, download the checklist and familiarize yourself with the criteria you should be using — instead of emotions — to make financial decisions.
Successful investing can (and should!) be done in a risk-managed way. Keep these 5 secrets in mind to profit while preserving your capital.