We are all looking for an edge in the stock markets. Some people leverage up their portfolios to maximize portfolio returns, and therefore also maximize potential risk and losses. Some look to limit risk with index funds and reliable blue chips. Regardless of your goals or even your knowledge level on stocks today, here are three reliable ways to boost your stock market returns.
1. Lengthen your time horizon
Trading according to the day-to-day movements of the market is nearly impossible. Legendary investor Warren Buffett refers to the stock markets as "Mr. Market" due to their personification of human emotion on a daily basis. Sometimes markets are inexplicably sad, yet rise against all odds; sometimes headlines are overwhelmingly positive but markets fall. Who knows when this will be? Trying to predict short-term movements is challenging, frustrating, and risky.
Share prices are merely meant as a guide to incremental additions and subtractions to a position. Buying a stock simply due to its low share price is a losing strategy that ignores company fundamentals. A company's valuation largely reflects the aggregate ratio of optimistic to pessimistic opinions on a stock's price at any given time. Knowing our species, do you want to trade companies based on whether people feel good or bad about the world on a given day? I certainly do not.
Let's take the legendary company Apple (NASDAQ: AAPL), for example. Shareholders who have held the tech stock since its IPO have made over 750x on their money. However, that return took extreme patience to realize. On its way to a $1.7 trillion valuation, Apple was slashed in half multiple times and analysts frequently predicted the company's downfall.
Folks had to tune out that intimidating noise for years while the stock treaded water. The same is true for quality companies such as Netflix, Salesforce, Amazon, Microsoft, and many more. Patience is key, but it can also be ineffective in isolation if an investor is not motivated enough to pick quality companies.
2. Do your research
Research and homework are vital to crafting a quality portfolio. Some loud personalities on social media like to puff cheap penny stocks, and you would be well served to ignore those misguided insights entirely.
Instead, study a company's financials rigorously. Does the stock have a track record of consistently strong demand growth? Does it seem like that growth will continue? Does it have sufficient access to liquidity for investing in expansion projects? Does it manage operations efficiently? All of these questions can be answered by studying financial statements, which are freely available to the public.
Beyond determining healthy financials, listening to leadership earnings calls and any public interviews is important. CEOs often provide valuable insight into the opportunities and challenges facing a company. Whenever the leader of a company we invest in speaks, we should listen and take notes.
To illustrate why research is so important, consider ViacomCBS (NASDAQ: VIAC). The stock tumbled from $60 to $10 a share due to fear that the cable company could not adjust to streaming trends. This was while it continued to parabolically grow its free streaming service, Pluto, and accelerated user growth on its other two platforms, CBS All Access and Showtime. The stock has since risen 150% off the lows and has received several upgrades due to streaming optimism. That information was publicly available to learn from before the share prices reacted.
3. Re-invest your dividends
Most brokerages offer investors easy access to a dividend reinvestment program (DRIP). You should seriously consider participating. Directing dividend yields back into your positions is an effective way to collect returns on returns, or compound received interest.
Compounding returns in high-quality companies over time is a fruitful practice. It is how Warren Buffett and countless other investors parabolically grew their fortunes over decades of investing. To Albert Einstein, the sheer wealth-building power of compounding earned it a slot as his "eighth wonder of the world." Be patient, and let the magic of compounding do its work.
The stock market can be a scary and intimidating place. Crafting your approach to investing is vital to navigating your way through its often choppy waters. Sure, a lucky few may happen to profit off get-rich-quick strategies; more will fail. Meanwhile, patience, research, and compounding are all winning strategies that have stood the test of time.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Bradley Freeman owns shares of Microsoft and ViacomCBS Inc. The Motley Fool owns shares of and recommends Amazon, Apple, Microsoft, Netflix, and Salesforce.com and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, short January 2022 $1940 calls on Amazon, and long January 2022 $1920 calls on Amazon. The Motley Fool has a disclosure policy.
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