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There is a lot of money to be made when trading the stock market,
however, losses are a fact of life for every investor. The difference
between successful stock market investors and the rest is simply in how they
deal with those losses. Its that strategy that will either make you money,
or simply add to your losses.
Many people point to Warren Buffett as an example of how well the 'buy
and hold' method of investing works over the long term. So while it is easy
to hear those words and accept them as a reasonable investment strategy, its
another thing all together to actually act on when your stock has dropped
20% during a single trading session.
Anyone has suffered through the woes of a bear market knows that
it is quite difficult to stick to your initial investment
strategy when all around you people are jumping ship and
liquidating assets. This is an investment strategy that requires
discipline along with nerves of steel. Fears of depression often
have investors heading for the hills and using logic that is at
best faulty and at worst financially devastating.
If you have done your due diligence on your investment before you bought,
then you should be able to weather the storm over the long term. As a matter
of fact, the drop may provide the perfect opportunity to add to your
position. Its important to remember that the buy and hold strategy works
best with large cap stocks.
In these situations, perfectly stable companies may begin selling for
fractions of their actual value for the interim-this by no means indicates
that these companies will not fully recover and prove to be a perfectly
solid investment. Below you will find three fundamental truths that should
help weather your short-term market losses and stand fast when others are
running for higher ground.
Its More Than Just A Sheet Of Paper
What you hold in your portfolio is a part of a company. Unlike day
traders who buy and sell over the short term, hoping to make money by
playing the up and down movement of the share price, long term investors are
looking to own a piece of a company; to share in the story of the company.
What your shares represent is a piece of everything the company owns. From
pens to buildings, you own a portion of it.
In order to be truly successful as in investor you must do two things.
First, you must not let emotion rule reason. Business and emotions are never
a good combination. This is no different when it comes to investments in the
stock market. Second, you must be able to evaluate the business and the
potential of that business completely separately from the price of the
stock. Remember that even the best company in the world is a lousy
investment if you pay too much for the privilege.
Focus On The Big Picture
Are you investing in the stock market with the big picture in mind? If
you look at any chart over the long term, you can easily identify areas
where a company has dipped, only to trade much higher a few months later. In
most businesses, there are seasonal changes that affect the share price. If
you are trading the stock market with the big picture in mind, then you can
easily identify this as an opportunity to add to your portfolio. When the
company releases news, how will it impact the company? Plenty of companies
have for example, sought financing by issuing shares. Typically, this
involves providing the buyer with the shares at a discount to the current
market price. Not surprisingly, the share price drops to that amount. This
is usually where the traders bail (hitting their stop losses on the way
down). However, if the company is a solid one, that is going to use the
money for expansion, acquisition or debt repayment, the market will reward
investors over the long haul. If you sold based on one days trading actions,
you would be out of a position, just when the company is poised to move
higher.
Whether your are investing in the stock market for the short term or long
term, the following tips should help to improve your returns:
Develop an investing plan, and stick to it. Execute your buy trade when
your plan says conditions have been met. Sell when your trading plan says to
sell. No questions. If you think your trading plan needs to be tweaked,
sell, tweak the plan, and then look for a security that meets your
requirements.
Remember there is money to be made going long, just as there is money to
be made going short. Just know the trend before you decide which way to go.
An educated investor will take on greater risk if the anticipated reward
is sufficient. If the research shows that a company is going to do very
well, taking extra risks at the right time can increase your returns. Using
margin can add risk to your portfolio, thus potentially increasing your
return. Ensure you have a Plan B incase your research turns out to be
incorrect.
Having a loss here and there in the stock market should be expected. It
isn't how you deal the gains so much as how you deal with the losses you
make along the way. If your ultimate goal in life is wealth then you are
missing some of the greatest value that this world has to offer in your
pursuit of that goal. Keep your investing goals realistic and honorable-be
prepared to take hits along with the wins and learn to roll with the
punches. That is what separates a successful investor from a failure as a
person.
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