In the days following the stock market crash that ushered in the Great Depression, Benjamin Graham taught the concepts of intrinsic stock value, margin of safety of stocks and fundamental analysis of stocks. The take home point of the things that Mr. Graham taught was that you can get reliable returns on stock investments. You simply have to approach the enterprise as you would a business and not as a trip to the casino. In light of the market crash of 2008 and second worst recession in three quarters of a century we may be back in the same place. How does one get reliable returns on stock investments? If you can make money trading stocks, investing in hedge funds, or leveraging your investments good for you. However, many lost their retirement savings in the 2008 market crash so something has to change somewhere. Many lost everything a few years back because they did not follow sound investment advice and diversify their investments; take a little off the table each time that a stock rose in price, or keep closer track of their investment portfolio. Here is what we consider sound investment advice about how to gain reliable returns on stock investments.
Look for a Reasonable Rate of Return
Old families with huge amounts of money give their stocks to a money manager with the expectation that they will earn at least three percent more than inflation on their investments year after year after year. This a good starting point when you look for reliable returns on stock investments.
Stick with What You Know
Professionals are famous for investing outside of their fields of expertise and then losing money. An example from years back is when the first effective acid blocker, Tagamet, came on the market. Physicians prescribed this medication in huge amounts and the pharmaceutical company that made Tagamet saw its stock soar. At the same time it was in vogue for those with a little spare cash to buy railway box cars and lease them out. Way too many medical professionals missed out on the stock profits that Tagamet offered and lost money investing in something about which they knew nothing. Stick with what you know, what you see with your own eyes, and what you already know gives reliable returns on stock investments. There are lots of dividend stocks that give steady and reliable returns on stock investments. Take the time to learn about these and add them to the list of what you know.
Look for Bargains
The intrinsic value of a stock is based on the expected income stream that the stock will generate over the years. Stick with what you know and pay attention to stocks with which you are familiar. From time to time you will see that a given stock is undervalued. That is to say given what you know about the amount of money that the company will generate it is priced way too low. At that point you should buy. Reasons why this happens include small stocks that the big analysts are not watching, takeover situations with successful or unsuccessful, basic changes in fundamentals that you are aware of because the stock falls within your area of expertise.
Do Not Lose Money
It is said that the primary rule that stock guru Warren Buffet follows is don’t lose money. It is also said his second rule is to never forget rule number one. Although some of the best returns on stock investments come from volatile markets so do some of the worst losses. Do not jump into risky investments unless you have unique insight into the stock and the situation and you can see a clear and profitable end to the story. If you want reliable returns on stock investments sit on the sidelines when things do not make sense and do not gamble away your hard earned money.