A lot of people see the stock market as a bit of a lottery, where you can buy a stock that turns you into a millionaire, while many other actions waste value and destroy the capital.
Indeed, much of the cynicism is due to the common belief that it is necessary to be a stockbroker or a professional insider to know what shares to buy and sell.
This is not true even though, while successful stock market investments are not easy, there are a lot of surprisingly simple rules to follow for anyone trying to improve their chances of beating the market.
In fact, I believe that following only these three rules is much more likely than not improving anyone's investment returns.
1) Don't control your emotions – It is easy to press the "Sell" button on the shares because money is an emotional affair that can bring out the worst in people. If an action that you purchased decreases in value over a number of days, but not because of specific news, it's easy to decide to have enough and press the sales button.
But consider how two investors could buy the same security on the same day at the same price, but one makes a loss of 20% and the other one gains 100%. The difference is that the latter has learned not to allow the stock market to control its emotions, rather than to control its investments through a long-term rational focus on the business.
2) I sell too early "you will not be ruined by taking profits in the stock market"It's a popular adage, most commonly disclosed by brokers who earn commissions every time they buy or sell shares with them.
Even selling too early is one of the most common mistakes made by novice investors. However, if you follow a long-term investment approach, you will understand that selling winners early is probably the most glaring investment mistake of all. This is because riding big long-term winners is the best way to get returns that can beat the market.
3) Speculation – global stock markets are full of companies more interested in taking and spending capital than their share price or, actually, building a long-term profitable business.
In fact, when remembering that stock markets have two main functions in 1) providing a platform for share trading 2) providing a platform for companies to raise and spend capital, it should come as no surprise that many companies just blow up capital and never make a profit. This is partly why stock markets exist. However, if you aim to avoid these companies (the obvious clues are that they have little or no profit or profit), you will almost certainly improve your earnings.
If you only remember these rules and would have a long-term approach only by buying strong companies, I think you will have a good chance of improving your returns on the stock market.
They are two famous companies that I would happily buy today Apple is Facebook, while for those looking closer to home the healthcare sector is a good bet for long-term growth.
In particular, how ResMed Inc. (ASX: RMD) e CSL Limited (ASX: CSL) have excellent track records, although I should note that I will probably evaluate both of these companies as holders today for evaluation purposes.
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Tom Richardson owns shares of Apple, CSL Ltd., Facebook and ResMed Inc.
You can find Tom on Twitter @ tommyr345
Randi Zuckerberg, former director of market development and Facebook spokesman and sister of its managing director, Mark Zuckerberg, is a member of the board of directors of The Motley Fool. The Motley Fool The Australian parent company Motley Fool Holdings Inc. owns shares in Apple and recommends Apple and Facebook. The Motley Fool The Australian parent company Motley Fool Holdings Inc. owns shares in CSL Ltd and has the following options: long January 2020 $ 150 calls on Apple and January 2020 shortly $ 155 calls on Apple. Motley Fool Australia has recommended Apple, Facebook and ResMed Inc. We Fools may not all have the same opinions, but we are all convinced that, considering a wide range of insights, we have become better investors. The Motley Fool has a disclosure policy. This article contains only general investment recommendations (with AFSL 400691). Authorized by Scott Phillips.
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