Everyone wants to make a profit, and after they achieve that, they only want to make it bigger. In this guide, we will talk about nine things that could help you produce the results you are looking for.
Lower Your Turnover and Frictional Expenses
If you have already been in the trading business for some time now, you’ve probably heard about this advice. Turnover can significantly lower your profit, and it is vital always to check whether or not an investment is worth keeping.
Frequent buying and selling moves might actually hurt your business because they involve frictional expenses. Coined by Warren Buffett, they mostly involve the many commissions and spreads you would have to spend your money on.
For example, one investor could spend 25 years investing $10,000 in blue-chip stocks. He would collect dividends and establish different businesses in the meantime. In contrast, another one could spend the same amount of money on frequent trades. He would also have to pay about 3% in frictional expenses every year. In the end, once they both retire, the first investor will have over $5.8 million, while the other one will have only about $2.6 million.
Make The Tax Law Your Friend
Placing certain securities in your 401k or IRA account could save you thousands of dollars every year. However, most people don’t even know that traditional IRA, SEP-IRA and similar accounts allow you to invest your money further.
You can use the profits to make additional investments, and they will all be tax-free until you withdraw them. In addition, if you happen to fall into the top tax brackets, you could make a lot more money simply by buying tax-free municipal stocks.
Observe Other Value Investors
Once you start believing in the value investing philosophy, you will soon see the results. Think about investors like Warren Buffett and Peter Lynch, who have made a fortune by quietly determining where they could find the best returns.
However, this also means that you have to adopt a certain form of analytical thinking. You cannot just invest in McDonald’s because you think they will have a 400% return in 10 years. Instead, you should carefully examine their p/e ratio, cash dividend programs, earnings, etc., before investing.
Avoid Following the Crowd
Just because a certain company is popular right now, it doesn’t mean that it is a worthy investment for you.
This is especially true if the company is selling potentially harmful products, or if their p/e ratio is over forty or fifty percent.
Before investing in such a company, you have to conduct proper research and make sure you know what they are selling. Write a short essay about their products, and why you think they could be a good investment.
Also, these companies are probably making a profit, but their cash flow is extremely low. Thus, there is a high chance they could go bankrupt because they haven’t paid their operating leases, for example.
Market = Stock
It is vital to view your whole portfolio as a single equity, and not as a group of many different stocks. By conforming to such a view, you can easily compare earnings, debt level and growth rates of each of your so-called “stocks.”
Deal With Your Own Finances First
Before spending the money you have earned, set up automated withdrawals to your bank account. That way, you will not be tempted to purchase things you don’t need, and you can accumulate wealth by simply forgetting about the money.
Know When To Give Up and Invest In an Index Fund
Most of you already know that you can experience huge losses because of those frictional expenses. In addition, inevitable life changes can severely set you back on your path to success.
However, instead of giving up completely, you can always invest in a low-cost index fund. These generate fewer losses and fewer turnovers because they only sell the stocks in case of mergers, de-listings, etc. Furthermore, they can substantially lower your total expenses. A regular mutual fund would charge you 1.25%, while a low-cost index fund could cost you only 0.15%.
Bigger Companies Aren’t Always Better
It is always smarter to invest in small companies than giving up your money for a famous one. The reason is quite simple: small businesses can generate solid gains by using a small base capital. Hence, they can grow their earnings at 15% or higher.
However, some more prominent companies have already lowered their prices, thus making themselves more attractive to potential investors.
Know the Potential Risks
Trading comes with a number of potential risks, and it is crucial to differentiate them from market volatility.
Liquidity and bankruptcy risks, as well as the permanent capital impairment, can severely lower your position’s value. Therefore, if you aren’t looking for a quick sell, bear in mind that you should use the low prices just to grow your holdings in a certain company.