The stock market is completely unpredictable, savage at times. Sometimes, it is a raging bull that sends stocks soaring creating castles in the sky. Sometimes it is a big ugly bear that pushes all stocks downward quickly. Lately despite the March lows we have been able to recover all the losses.
The recovery has been sustained by the various news we have been seeing about the discovery of a vaccine for corona. Which in turn gives a reason for wishful thinking investors, to jump into stocks, as soon as they read any news related to the vaccine. The DOW hit 30,000 recently, and this historical mark is the epitome of the irrational exuberance we have been experiencing.
The Shiller P/E ratio represents the average of the company’s earnings, over the past 10 years. It stands today at 33.24 for the S&P 500. It is significantly higher than the Shiller P/E during black tuesday of 1929, and Black Monday of 1987. The Shiller P/E ratio is an incredibly simple way to calculate how the market is priced. Instead of the regular P/E ratio, the Shiller P/E is calculated using the average earnings of the last 10 years. And today the markets at one of its most overpriced moments in history. The only time when the Shiller P/E ratio was higher than today was during the dotcom bubble.
To quote Robert Shiller, nobel literature and writer of the book bearing the title “Irrational Exuberance”:
“Irrational exuberance is the psychological basis of a speculative bubble. I define a speculative bubble as a situation in which news of price increases spurs investor enthusiasm, which spreads by psychological contagion from person to person, in the process amplifying stories that might justify the price increases and bringing in a larger and larger class of investors, who, despite doubts about the real value of an investment, are drawn to it partly through envy of others’ successes and partly through a gambler’s excitement.”
One of the reasons we have seen an increase in speculative movements in the stock market has been a consequence of the lockdown. The lack of social activities, and with authorities asking us to stay inside, many people have become day traders. This new trend that has been sustained with people bored at home, having a shot at the markets. Could have extremely negative consequences, and could end up badly. And if you are entering the stock market, you have to prepare for this wild ride.
It can be a rough ride or it can be a smooth one depending on what strategy you employ and what assets you acquire. You should take your precautions and plan your investment strategy thoroughly. To help you here are five things to consider when investing in the markets.
Source: More Dividends
Set Your Limit
Every investor on the stock market must set his own personal limit. No matter if you are selling naked options or buying utilities, there should be a personal limit of losses you should establish. Trading with margin can be extremely good when things are going well. But it can turn into a beast, when the tide turns against you. Always remember you should not risk everything in one idea or tip you heard on the subway. You will end up with a loss that might be bigger than your equity. It’s better to control risk appetites and speculative urges.
Source: Chronic Health School
Leave Your Emotions Aside
Never ever get emotionally attached to any asset you own. It is easy to become emotionally attached to a stock or bond that has favored us in the past. But the reality is that past performance is no indication of future performance. If you attach emotion to different holdings, you will keep them, making you lose out on many opportunities to make money.
Follow Only One Rule
Rule nº1: Never Lose Money Rule nº2: Never forget rule number 1– Warren Buffet’s rules have fared him well. And one of the reasons is he books profits. If you don’t catch it, it will run away. Therefore, you must always book profits and cut losses in the stock market. “Nobody ever lost money taking a profit”, a famous quote by Bernard Baruch, a legendary speculator, should be – in your mind at all times.
The Market Cannot Be Timed
The market cannot be timed: Market timing is an extremely intricate task. To base all your trades on a hunch that the market will go up or down at a certain point is not a good idea. When you buy a stock that you feel comfortable holding in the long term, you should stick to it. Trying to swing trade with a 30% or 4o% variation in a stock that will go up over 1000% in the next 10 years is a waste of time and energy. Choose your winners carefully instead.
Know What You Own
Know what you own: It will pay you well if you understand the stock you are buying into. What are its finances? Is it making profits or losses? Is the market price right?Does the sector have a bright future? Look, you will make plenty of money if you know what you are doing in the stock market. So, get savvy with figures and with the economic and global trends. Analyze all the factors affecting a stock and understand why you should own that stock.
Well, these are some basics you have to understand before you enter the stock market. Obviously, you will make mistakes, but that’s normal – every investor does. The key here is to analyze your mistakes and learn as you move forward. Having the right strategy and sticking with it, will ensure that you will ride on the booms and weather the busts. It does not take a genius to make money on the markets, common sense and long-term mentality are the deciding factors.
Featured image source: Worldfinance