Sticking with the baseball theme, this article is going to look at the fascination with people wanting to find that ‘home run’ stock. It’s stupid. Quit doing it. It’s unnecessary and a really bad strategy.
I don’t know how many times I’ve tried to explain to people that getting rich isn’t a strike of lightning or a quick grab, it’s a slow and steady process. The tortoise always beats the hare and it’s the same with the stock market. Sure, it’s cool to say that you caught that lightning in a bottle and doubled or tripled up on one stock, but if a stock is going up that much, it’s pretty volatile and you’re probably putting yourself at extra risk.
The key to succeeding in the market is to go for singles. Singles win baseball games, not home runs. Sure, the home runs get you on Sports Center and all those other TV shows, but it’s not a good strategy at all and it puts all of your eggs in one basket.
The way I look at a stock is, if I can get a 2-3% return in a month I’m golden. That’s all I want, 2 to 3%. So, on a $20 stock I’m looking to get to $20.40 or $20.60 a share. This is easy to accomplish and if you can’t find stocks that go up 40 freakin’ cents, you shouldn’t be trading stocks, stick to index funds and ETFs.
Think about it, while the majority of people are shooting for the big bucks, I’m taking 2-3% a share, over and over, all year long. If I get just 2% a month, that’s 24% a year, totally killing the stock markets average return of 11%. (It’s actually more than 24% a year because with each sale I have more money to buy more shares the next time, so I’m compounding as well, but we’ll keep the math easy for those of you that can’t grasp this concept.)
Quit thinking you need to get 11% out of one stock a year. That’s a $2.20 gain for a $20 stock. That’s pretty difficult to pick on a consistent basis, instead, shoot for a lot of small gains throughout the year.
Even after taxes, if you made 24% gains and paid 30% in taxes (which you don’t), you’d make $3.36 cents on every share of a $20 stock. At your buy and hope 11% stock market average on the same stock you’d only make $2.20 BEFORE taxes and be 100% at risk the entire time.
That’s the other thing about TRADING stocks vs HOLDING stocks, every time I take my profit and get out, I’ve cut my risk to zero, zip, zilch, nothing.
(A little advanced lesson here for those of you who ‘get it’) Now, this isn’t to say that as soon as a stock hits 2% you automatically sell it, no no no. When a stock hits my 2 or 3% target, I put a stop loss on it for the amount I paid for it, locking in my original investment. Now, I’m only risking my gain, not my principle (not entirely, but pretty close). When the stock continues to go up, just move your stop loss with it. If it goes up to 4% gain, move your stop loss to protect your 2% gain. Keep chasing the gains and locking in the profit.
This is how you get rich in the stock market. This is how you win the game. You grab small gains, ‘singles’, over and over and then get out of risk.
– Invest in peace….