So you just got ready to invest with all the extra money you’ve accumulated! You always wanted to do it and now, when you finally have the capital to do it, the news bulletins warn you not to? Well, I have some great news for you! You can go ahead and invest regardless of what it says on the news. In fact, great investors, such as Warren Buffet, actually advise new investors not to pay attention at all on what the media sources have to say about investing, and they have their reasons.
This is because investors who have been in this game long enough, know how the market really works. The reason you should not waste any time listening to these news resources is that their objective is quite different from issuing various statements. For one, it could be an attack on the current government to demonstrate its flaws. Other reason could be simple viewership as it no secret that investing is becoming a thing these days. More new investors such as yourself are drawn into this business, the more watch time these media sources get, which means more money for them. Hence, while your goal is to become successful from investing, these media sources you might allocate time to, have no plausible gain from your success. Which is probably why, these media sources are only selling spicy news to trap new investors into giving watch time.
So what should you do, when news bulletins are warning you of a sock market breakdown? Well, first of all, you need to create a sound understanding of how stock markets work. Only then can you build proper strategies and succeed in investing even when news bulletins are telling you otherwise.
What you need to know?
Various researchers have delved into the investing market to understand better how they all tend to work, are there any noticeable patterns and what sources you should or should not dwell into. These are the three takeaways that are absolutely essential for you to be aware of.
1. Markets generally increase over long period of time
From various historical researches done on stock markets, we know one thing for sure. Investing markets are generally more forward looking. This basically means that various securities more or less show an increasing trend over the long run. Therefore, even if there is an actual decrease in basic points, the market will eventually go up Investopedia.
This also gives one of the most important strategies to invest which is to invest in long term assets. More on that later on. Right now the only thing you need to know is that it doesn’t matter whether or not the market is performing well or not. It will eventually do so in the long run. The key is to be patient and optimistic and the rest will take care of itself.
2. Market Changes can due to various reasons
The second takeaway is that market shifts can have a lot of different implications and reasons all together. For instance, to list a few, the share prices for a particular company might be affected from its performance, its market reputation, the economic state of the country or even market perception about the company. The reason it’s not a good idea to trust news resources is their ability to forge actual statements to the ones they want. They can either exaggerate or undermine all of these above conditions to what best fits them. Regardless of what the media says about the market, it basically has either of the following two events; 1) Either the stock prices go exceptionally high or 2) the prices plunge down. Media can control this because they have the ability to drive the market to some extent. When they reveal positive comments about the market, more and more people start investing raising the overall price. On the other hand, when they raise negative comments about the market, people go into panic mode and start selling their securities. This drives the prices down creating one of the most hateful traits of a market, volatility. But the silver lining in all of this chaos is the fact that both of these effects are temporary in nature. Which leads us to our third takeaway the Equilibrium Principle.
3. Equilibrium Principle
According to the renowned theory known as Efficient Market Hypothesis or EMH for short, markets usually return back to their equilibrium prices that are also their actual value regardless of what’s happening in the market. Hence, just as we maintained in the first point, it doesn’t matter what the news is saying about the market, eventually market is going to proceed towards its actual value. Hence, if a company’s share value has been undervalued or overvalued due to media statements, all you have to do is to wait it out. The EMH also maintains that the only way for investors to receive premiums is to remain invest over longer periods of time. This is because, as we discussed before, markets show an upwards trend in the longer run FOOL.
However, there are various other ways for you to earn during such troubled times and this is what leads us to building our game plan!
The Game Plan when market doesn’t look too well
1. Investing in Value Stocks
Investing in value stocks is a great way to earns handsome amount of premiums. Warren Buffet, a renowned investor, also earned most of his earnings form value stocks.
Value stocks are shares of company that have suffered with such issues that result in overall decrease in their prices. These companies, typically have lesser EPS ratio, lower market reputations or our facing legal charges. What makes such companies attractive are their lower prices. Since these companies are suffering in one way or another, they typically offer same amount of shares as compared to their competitors but in lesser prices.
However, you need to be very careful not to invest in a company that is on the verge of bankruptcy. Hence, through a little bit of analysis, you will be able to find out whether or not the company is likely to do well in the future. If so, you should go ahead and invest in it regardless of what headlines suggest. If you’ve remained long enough, you will be able to benefit a lot more from the company than investing in a company that has remained stable.
2. Diversifying portfolio
Earlier in our discussion, we discussed the most hated trait of investing market that investors want to avoid. That is the volatility. If this volatility, is too high then so is the risk. However, there does exist a way to minimize the risk while keeping the profit same. That is the magic of diversifying. In the unwanted scenario of headlines to actually be true, you would want to remain in a position where you have lower risk while higher returns. In such a scenario, your best friend will be diversified portfolio as it is the only way to minimize your risk and increase returns at the same time.
The key is to invest in markets that are less correlated, as those markets will not necessarily move in the same direction. Since, these markets don’t move alongside they will cancel out each other’s volatility while offering combined revenues. Hence, you will be able to reap the best out of both worlds.
3. Doing the Opposite
The last piece of advice is also a counterintuitive approach. It may sound seemingly ridiculous but has worked for numerous successful investors. It is to do the exact opposite from what the market is doing.
As we already know, media sources can drive the prices up or down of different markets. The art is to remain confident and to do the exact opposite of what the market does.
If the media sources overhype the market, start selling your shares as they will be more demand. Since, more demand means increase in prices, you will be able to sell your shares at a premium price. If, on the other hand, media sources under rate the market, it will create the market prices to go down. As everyone else sells their shares, you should hold onto them while also buying newer shares. As the prices will be driven down, you can purchase these shares at a lesser price than that of their equilibrium. As we already have established from EMH, shares will eventually lead to their actual price which is going to be higher than what it was selling previously. You, can then reap the benefit out of the premium price that share will eventually lead too. Hence, by doing the opposite to what the media suggests, you will be able to effectively beat the market.
Therefore, it doesn’t matter what the new headlines tell you about the stock market. if you have decided to invest, then you should go ahead and do so regardless of the latest news.