The Gist: Making money in the stock market probably isn’t as complicated as we tell ourselves it is.
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I almost never talk about investing, especially in the stock market and things like that. I think it’s usually a boring topic, but I do enjoy actually investing. Kind of like golf I guess—fun to play but a snoozefest to watch or…*zzzz*…
Sorry, I fell asleep there for a minute.
Oh, the stock market. We’re all confused as hell about what to think of it because the expert pundits do nothing but argue about what people like you and me should do and the news media is only interested in reporting the soaring highs and crashing lows.
We’re all convinced it’s the riskiest place to put our money and every day we’re either going to get filthy rich or lose everything.
So, lots of people make panicked decisions about their money, and the end result is a chaotic mess that makes you dizzier than a tire swing.
Meanwhile, there’s a group of calm and level headed investors who mostly keep to themselves, make informed decisions and end up with piles of money. They take risks, but they take smart ones, and they rely on their not-so-common sense when it comes to making good choices.
I’m not about to tell you I’m an expert investor or that what follows should be taken as some sort of bible of investing advice. In fact, I’m pretty sure doing that could get me in a lot of trouble because I never paid anyone enough money for the piece of paper that qualifies me to say it, and we have these things called “laws” that are supposed to protect you from people like me.
But, I have been investing in one form or another since I was 22 (keep in mind I’m only 26), and I can say that over the last year building Advanced Riskology, I’ve been much more comfortable as a result despite all the ups and downs in the market.
Investing in the stock market doesn’t have to be scary or overly confusing. There are a few rules I follow every time I buy a new stock. These are all ideas I’ve learned from other successful investors and now I can hopefully pass a few along to you. Do with them as you will.
Are You a Stock Owner or Business Owner?
One of the first myths that needs to be dispelled is the idea that you “invest in the stock market.” The stock market is only a vehicle. What you invest in are companies, and companies are run by people like you and me. When you boil it all down, what you’re really investing in is people.
The most important thing I’ve ever learned about investing is that my own gut feeling about the people who run a business is usually a pretty good indicator of whether or not I should jump in.
When you buy stock, you are literally buying a stake in that business. Congratulations, you now own a company!
- How do you think that company should be run?
- What would you do to make it more profitable?
If your ideas don’t line up with how those people are actually running it, you’ll probably end up with more headaches than money.
You’re Already an Expert, So Act Like It
It’s easier to make good decisions when you buy things you actually know something about, right? That rule doesn’t change when it comes to buying stocks.
If you leave your investment decisions to all the other “experts” you’ll get advice that’s great for them, but perhaps not so great for you. Fortunes aren’t built from hot stock tips on CNN.
Side note: If it’s on CNN, it’s not a hot stock tip anymore anyway.
Chances are, in all your years on Earth so far, you’ve gathered up a fair bit of knowledge about something. Use it!
- What kind of hobbies do you have?
- What kind of things do you do every day?
Ask yourself these questions and then ask yourself which companies make your life easier by helping you do those things better. That’s probably a good place to start.
Would You Lend Money to Your Uncle?
For just a moment, let’s set aside the fact that if your uncle is asking for money, it’s probably a bad sign.
The point I’m trying to make is that when you buy stock in a company, what you’re really doing is giving them a loan. The only reason a company offers stock to be bought is because they need money to buy or do something that they can’t afford to do themselves. Why else would you give up a piece of your company?
If someone you actually know asks for a loan, do you just give it to them or do you take a second to think about how they’re going to pay it back?
Let’s consider your uncle again for a second; he wants to open a pizza shop and needs $5,000 from you to get started. If you know the simple secrets of a $100 business, then you know this is ridiculous, but humor me for a second.
How much debt does Uncle Joe already have? If things go south, does he own anything that can actually be turned into cash to pay you back? Pet’s don’t count! Is he even asking for enough, or will he be back in a few months with another request from Nephew National Bank?
These are questions you’d think about before shelling out your hard earned money to Uncle Joe, and they’re questions you should think about before you buy stock in that trendy new company.
Ignore Everybody and Put Decisions on Autopilot
This one is fairly simple. I don’t ever buy stocks that I can’t see myself holding onto for at least five years anymore. In fact, because I’m still young, my target is closer to 10-20.
Because of the time frame I invest for, I have little reason to care about what happens tomorrow, next week, next month, or probably even next year. That means I can ignore all the talking heads on TV who change their minds every day about whether I should be excited as hell or frightened and curled up in the fetal position. Time is on my side and I’m going to take advantage of that.
In the same breath, it’s also a good idea to know beforehand what your risk tolerance is. If you’re a regular reader here, it’s probably safe to assume it’s higher than most, or at least on it’s way up!
Before you buy, set a price that you’ll sell at, no matter what. Know how much you’re willing to lose and how much you’re happy with gaining. Yes, this means you will probably miss out on a whole bunch of money at some point, but your ability to make sound decisions in the heat of the moment are usually, well, pretty poor.
Take the benefit of the clear mind you have now.
Always Charge Interest
After learning that most of the wealth created by the stock market throughout history has come from dividends (a regular installment of money paid to each share of stock from a company’s earnings), I’ve invested only in businesses that pay them.
While you can’t always count on the value of a stock rising, you can usually count on a steady dividend if you own stock in a strong company. You can kind of think of this as getting an interest payment for the hard earned money you’ve trusted them with.
In fact, there are people who invest solely in dividend stocks in order to build up an income stream large enough to support them. Think about it; if you own enough to bring in a few thousand dollars a month in dividend payments, what do you need a job for?
While I love what I do and don’t ever plan on quitting, this is my long-term strategy. The idea of building an investment portfolio that produces enough money to live on perpetually is very attractive. It’s something I can pass onto a child or even turn into an endowment that helps people who need it…forever.
“The Advanced Riskology Endowment.” That has a nice ring to it, doesn’t it?
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These are the investing rules that I and many others live by, and hopefully you see some merit in them as well. Truth is, they’re things most of us already know, and they make perfect sense. The problem is that they’re boring and easily overshadowed by the sensation—also known as bullshit—that seems to surround the investing world.
Ignore them at your own peril. Or, you know, at your own benefit. I don’t own a piece of paper that allows me to tell you which is right, so you’ll have to decide for yourself. 
Bonus Worksheet
I have a worksheet that I built for myself to help me put this “uncommon sense” into practice when I buy a new stock (yes, sometimes I need an aid to follow my own advice).
If you’d like a copy for yourself, just sign up for the Advanced Riskology newsletter in the form below and you’ll get instant access to it, along with a few other highly useful subscriber only bonuses. (If you’re already subscribed, check your email…)
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Now over to you: What uncommon sense rules do you try to live by?
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Image by: wallyg
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