My goodness, last week was exciting in the stock markets! Many shares shot up, leading me to corrupt an old market adage like this: “Shares can go up as well as down”.
But just as with bog rolls, there’s a high risk that investors could be tempted into panic-buying. And it could prove to be a dangerous move if you chase share prices up when they’re rising so rapidly. It doesn’t take much of a reversal to leave you nursing losses.
In such volatile times in the markets, I think it’s wise to be in control of your investing more than ever. We’re all susceptible to raging emotions, and seeing the markets shoot up from a depressed state could lead to the fear of missing out.
Here are three ways you can get your investing under control. If you act calmly and rationally now, you may be glad you did later because you’ll be on the way to building worthwhile gains from shares.
Be very discerning
Opportunities abound in the stock market right now. But rather than rushing in and buying handfuls of shares with little consideration, now’s the time to raise your requirements and insist on the best.
I’d focus on the quality of the underlying enterprise and the niche the business enjoys in its markets. If the earnings are sustainable and growing, and margins are robust, you’re off to a good start.
But I’d also look for a strong balance sheet, room for the business to grow over time, and a valuation that makes sense of an investment in the firm’s shares. Sit back, close your eyes, and invoke the powers of your inner Warren Buffett. What would he do? You do the same.
Focus on dividends
Lord John Lee taught me in his book How To Make A Million – Slowly that dividends are perhaps the most important factor when considering an investment. Lee first looks for a decent and growing return from the shareholder dividend and believes that if you can be sure of that, capital growth from the share price will take care of itself.
He also believes you can learn much about current trading and the outlook for any business by examining the directors’ decisions around dividends. Indeed, focusing on dividends and their growth is a simple yet powerful tool to use when analysing share opportunities.
Play the long game
Never mind that share prices were shooting up last week, you can fry bigger fish if you adopt a long-term investment horizon. I’m talking years and decades instead of days, weeks and months.
Warren Buffett likes to hold the shares of great companies indefinitely, and Lord Lee has turned his investments of thousands into several million over time. Go in with a business owner’s mindset rather than the mindset of a stock jockey who’s only aiming to collect a few percent here and there. If you do that, last week’s market action will likely pale into insignificance over time.