I say this all the time because it is true: making great amounts of money in the stock market is not only possible, but it is easy. The only catch is that you need to do it properly!
A really big part of “doing investing properly” is applying the 6 basic tips we present in this article.
These tips are so basic and so important that I would recommend that you make sure to re-read these tips every month, or even more frequently.
We actually presented these strategies summarized in one of our previous blogs (Beginner’s Ultimate Guide To The Stock Market), and if you’re not too sure about the basics of the stock market, then you should definitely read that first.
Some of you are probably already familiar with these tips, and that’s because of a good reason: It works. Every investor worth their salt will agree on that, and that is why we tell others to follow these tips as well!
I mean, there are still some other things you need to know to be a successful investor, but there are the most fundamental parts of a strategy.
(Please note that any mentioned companies are NOT recommendations, but are just examples for that specific topic of the blog.)
Part #1: Buy Large, Good Performing Companies
The stocks that you buy will need to be stocks of large, well-known companies. If you’ve never heard of the company before, you probably should NOT buy their stocks.
As a good starting point, in the Philippines, the 30 companies that are part of the PSE index are mostly large and fairly popular companies. You can check the list on the official PSE site here.
These include Jollibee Foods, Puregold Price Club, San Miguel, BPI, BDO, Metrobank, SM Holdings and many more to compose the PSEi.
You should make sure to invest in large, well-known companies because they inherently have the ability to withstand economic difficulties due to their size. Large companies can also expand and improve easier compared to smaller companies.
They can’t just be huge companies though, they also need to have good performance over the last few years as well. Companies are “performing well” when they earn a lot or have a lot of net income.
The best companies never have years where they get net losses, but instead, they are able to continually increase their net income year after year. These companies are often rare and expensive, so usually steady levels of income are enough instead of yearly increasing income.
You should look at the latest 5 years of income to be sure.
Examples: Here we have JFC, FGEN, and PAL as an example of companies with great increasing earnings, good earnings and terrible earnings, respectively. (Numbers in parenthesis are negative, or a net loss.)
I mean, do you want to invest your hard-earned cash in a company that is losing money? I don’t think so. Stick to either companies with perfect earnings record, or those that are at least steady.
How can you check if the company is actually making profits?
Your broker will have reports that can give you information on whether a company is earning well or not. The data from the image above is from our broker, COL Financial. So just navigate your broker’s website and look for those reports. We will be making a blog post in the next few weeks on how to properly do this, so please look forward to it!
Part #2: Buy Stocks Of Many Companies
As the saying goes: Don’t put all your eggs in one basket! This is called diversification.
There is more risk in buying the stock of just one company, compared to buying stocks of multiple companies. A lot of things can happen over the years and your only investment might not perform well due to unforeseen circumstances.
To protect yourself from these unforeseen circumstances, make sure to invest in at least 3 companies to start. You can increase it to 5 after some time if you want to. You can even go up to 10 or 15 (or maybe even 20) companies, but having more than 20 is no longer advisable.
This way, even if one or two businesses do horribly in the future years, you’ll still have the gains from the other businesses. This will still result in a net gain for your total investments!
If you invest following our guides properly, all of your investments will probably perform well over the long-term, but it never hurts to play it safe just in case!
We can actually talk about diversification with an entire blog post, so we will. We’ll be making a post to help guide you in doing proper diversification, so be sure to stay tuned to our new blogs every Wednesday and Sunday.
Part #3: Buy Low, Sell High
This is extremely easy to say and remember, but I have observed that for most people, it is extremely difficult to actually do. That is mostly because they let their emotions dictate their decision making.
Let’s talk about the Buy Low part first.
The concept here is simple: You should only buy a stock when the stock price is determined to be “cheap”. Also, when the stock price goes down, you buy more of that stock.
Your broker should have recommendations on whether the price of a stock is “low” or “cheap”. Essentially, you’ll have to trust your broker’s recommendations here for the most part.
However, we will also be teaching other ways to determine if the price is actually cheap. This will be on a separate blog since it’s a whole topic on its own. For now, just follow your broker… or stop buying stocks until we release the related blog post.
Also, remember that when you buy stocks and the price goes down, you buy even more of it. Yes, even when your portfolio is showing a loss, you still buy more of that stock. This lowers your average costs so when you finally sell it, you get higher gains.
Now let’s proceed to the Sell High part.
The concept is also really simple: Essentially, never sell a stock at a loss. Sell it when it has risen by a good amount.
(However, the exception on this is when you improperly picked bad companies as investments (maybe because you don’t follow our blogs😉), then selling them at a loss is probably better.
If you follow our advice though, especially from our future blogs, then you will be able to effectively avoid bad companies. And avoiding these terrible companies is actually easier than you think. More on that in the near future!)
Your broker will most likely have guidance on when to sell the stock. And, you probably guessed it, we will also make a whole blog post to guide you on when to sell as well.
Some of you will probably ask this question: “It has been 4+ years and my stocks have not yet gone up, in fact, they have gone down. What do I do?”
Hold on to them. Do not sell them. If you choose the correct stocks, it might actually take years before you see any profits.
Case and point are what happened to our San Miguel Food and Beverage (FB) investments.
We bought it at around P20/share in 2015 and it just went down to P12/share and didn’t go back up until 2017. However, we kept buying it while it was going down during those years!
We kept the investment for 3+ years even though it wasn’t showing any gains. Then, in 2019, it went up to P117/share and we sold it. From P20 in 2016 to P117 in 2019! The 4+ years off waiting paid of tremendously!
Some shares might take more years, maybe even close to a decade, but shares of good businesses will always go up.
The next step will have more information about how buying low is actually safe as the stock market always goes up even higher after it has dropped!
Part # 4: Invest over the Long-Term
When we say long-term, we mean ideally decades! And about 7 years at the shortest.
When you invest in the stock market, it should be the money that you save up for future goals like your (early) retirement funds, your children’s college fund, round the world travel or even building your high-tech dream home.
Since these goals are still far away in the future, it would make sense to stay invested in the stock market until the time comes that you get enough money from your investments to spend on your big goals.
Staying invested in the long term assures that you will make gains and not lose money. This is because stock markets always go up, as shown by historical data.
Sure, there are times when the stock market goes down, sometimes it even goes down by a huge amount! However, historical data points out that the stock market always recovers after that and eventually goes up even more.
Here is a chart that proves that the PSE has been at the highest is has ever been. I also bet that the PSE will go even higher in the future.
Just to prove the point further, here are charts from the stock markets of different countries as well. We have presented these in previous articles too.
So, stay invested in the stock market even when stocks drop to levels deeper than the Mariana Trench. Your investments will recover, and by buying stocks during the drop, you basically almost ensure that you will get high gains. Stock markets are a lot like roller coasters in this case.
Part #5: Invest Regularly
This part simply turns investing into a habit. At the same time, it also aids in lowering the average costs of your stock’s cost.
We advise you set aside part of your monthly salary as savings that you will invest. It can be any amount, but the important part here is that you stick to investing that amount monthly. Make it a habit.
Here is what we do: We’ve already budgeted a certain amount that we designated as our monthly savings. On the day we receive our salary, we immediately transfer that amount from our bank to our broker account for our stock investment.
And yes, we don’t keep our savings in the bank, or at home (only our emergency fund is in the bank and at home). Our savings are for large goals like buying a house, an around-the-world vacation, and early retirement.
All these are going to happen a decade or two from now, so we might as well invest it in a high-return investment like the stock market.
Investing regularly is also a great way to average your chosen stock’s cost, especially if it is currently going down.
Let’s assume that the first time you buy a stock, the cost will be at P50 per share. Now, let’s say the stock price went down in the next month to around P45. Then in the third month, the price went lower to P40 per share. Then on the fourth month, it increased really high to P70/share and you sold it.
Scenario A: If you only bought during the first month alone, your average price will only be P50.
Scenario B: If you bought on all three months, your average price will not be P50 per share, but it will be P45 per share.
Why is this a good thing? Well, as mentioned in Tip #3, you will want to buy low. And the lower you can get that average, the higher your gains will be.
In Scenario A, your net profit per share will only be P20 per share (P70 – P50). In scenario B, your profit will be P25 per share (P70 – P45).
That P5 difference might not seem much, but if you had 10,000 shares of that stock, that would be a difference of P50,000! So, always buy monthly if possible, especially if the stock price is going down!
Tips #6: Re-invest your gains
This step only applies when you finally sell your stocks at a profit in the future.
It’s crucial that you don’t spend the money from selling the stock, but re-invest it instead.
You will get more profits in the future by re-investing your original investment plus the gains you got, rather than re-investing just the original investment only and spending the gains.
Essentially, do not withdraw your investments unless you’re ready to spend it on your huge goals.
Using This Strategy
If you’re serious about investing, you’ll have to familiarize these 6 parts off the basic strategy by heart. After all, these are the core of the long-term strategy. Re-read this when you can! So make sure to bookmark this or save it somewhere.
So many successful investors, including us, follow these simple philosophies. So if you’re a beginner, you should make sure you follow this thoroughly as well.
The only other topic that is just as important as this would the lesson on picking which specific stocks to actually invest into. An article about this is coming soon. Stay tuned!
Lastly, if you learned something and you like our blog, please help us spread our investing lessons by sharing this. I’m sure others can learn from this as well. There should be a social media button you can click to share directly. Thank you!
Good luck and I hope you learned something!