The investor and financial expert Bernard Baruch, also known as the “Lone Wolf of Wall Street,” said, “The main purpose of the stock market is to make fools of as many men as possible.” The stock market is complicated, and even the best financial experts are stumped from time to time when the market refuses to obey their predictions.
Everyone is looking for a bit of an edge over the rest of the market, so here are five ideas from modern investors that can help you manage your investment portfolio.
#1. Be Patient
When it comes to stocks and investments, Warren Buffett and Dennis Gartman (the chairman of the Akron University Investment Committee and producer of “The Gartman Letter”) agree that you have to be patient. The market will fluctuate, and there will always be rough days.
Throughout all of that, a good investment often needs time. Expecting a 20% return in 24 hours is unrealistic. There have certainly been times where that has happened, but in general, you have to wait to see major growth and returns on your investment.
#2. Understand Useful Diversification
Diversification is a term that every investor knows—it’s the idea that you need to spread out your investments to help protect against any crashes or depressions in any one section of the market. While this is a great strategy when investing, if you rely too heavily on diversification, you might miss out on a stock that you really believe in.
Bill Gross (the co-founder of PIMCO) and Warren Buffet both follow the idea that if you believe in a stock and you think that there is potential growth in the company, you should invest more in select areas rather than strictly diversifying. You should still have diversification in your investments, but rather than only putting 1% of your total investment into a stock, for example, you can increase that to 10%.
As Bill Gross said, “Good ideas should not be diversified away into meaningless oblivion.” If you’ve done your due diligence and you believe in a stock, invest in it and make it worth something. But also be aware, increasing exposure to one stock will also increase your portfolio’s risk to any factors that can impact it.
#3. Consider Value Investing
Value investing is almost like going to the flea market and hunting through racks of clothes in hopes of finding a lightly used Tom Ford leather jacket for only $50. It’s possible, it’s amazing when it happens, but it requires a lot of searching and understanding exactly what you’re looking for to do it right.
The core idea of value investing is to look for companies that the market has under-valued, and investing with the assumption the market will eventually see their merits.
For Ben Graham (the “Father of Value Investing”), it only meant finding undervalued companies, but the markets changed a bit by the time Buffett started to invest. For him, value investing also means identifying companies with a high potential for growth.
Knowing how to identify companies that the market has overlooked takes a bit of training and can be risky. There is a big difference between investing in a company that has been overlooked and investing in a company that is cheap for a reason.
#4. Don’t Do What Everyone Else Is Doing
Not following the crowd when it comes to investing in the stock market is called contrarian investing. Contrarian investors like Ken Fisher (founder of Fisher Investments) and Ben Graham believe that popular crowd behavior can lead to overvaluation and that finding less popular stocks can leave more room for profit.
This can be a risky strategy that can take a long time to pay off. Contrarian investing thrives off of a volatile market—selling when others are buying and buying when everyone else is selling. Doing this allows you to buy stocks at low prices and sell when they are in high demand, which may result in profits, but it requires a serious amount of research to see things others miss.
The biggest key to success with contrarian investing is not just investing against popular opinion but investing against popular opinion with enough market research and statistics that can support your choice.
#5. Attempting to Time the Market Is Ineffective
Market timing is the idea that the market moves in cycles and that there are indicators that can reflect which direction the market is going to head. Supporters of this idea believe that by recognizing these trends, they can sell when the market is going down, avoid the low dips and depressions, and then move back in when the market is back on the rise. This way, they never experience the low points and only experience the growth.
However, financial experts Warren Buffet, Ken Fisher, and Andrew Langdon (the founder of FivePoints Financial Planning) don’t believe in it and think that playing the game of timing your investments is ineffective and will ultimately cause more loss than growth.
The first problem comes from trying to guess when to act on timing. Just because an apparent pattern of loss or growth has occurred in the past does not mean that pattern will recur in the future. This can lead to mistakes in timing by either leaving too early and missing the full value of the investment or coming back too late and having to pay at a higher rate.
The Buck Stops With You
By doing research before you finalize any investment decisions, you can start to make well-informed choices rather than making common investment mistakes. It can be tempting to hop in and hope for the best, but if you want to make the most of your money, you need to be knowledgeable about what you are doing.
Keeping up with analysis from modern investors is a good start, but it shouldn’t be your only stop. After all, this is your money, and what works for them may not be the best choice for you. Keep researching and finding out what investment strategy works best for your needs and goals.