What really matter about the stocks you invest in?
What does matter is having conviction that the future earnings power of the company will continue to grow, and having the patience to wait until that happens. Despite what you may hear, the majority of the 'big money' is made over long periods of time by patient and diligent investors. Lowering your aspirations for immediate investment returns may be the most profitable behaviour a long term investor can develop. Not expecting great returns, an investor becomes more patient, less over confident, will generally wait a lot longer to have the full story play out and does less trading. When you eliminate the short term mindset, you stop trading and racking up unnecessary order fees.
Why stock trading fees can eat up your investment returns?
Trading fees are worth further mention. If you are a beginning investor, because of the smaller amounts of cash being dealt with, excessive trading should be avoided entirely. For example, say you wanted to become a short term trader and you had $5000.00 to invest. You make 4 trades a week; for each trade, you have to buy and sell once each, so that's 8 orders for 4 trades per week. Assuming a trading commission of $10 per order, this trading strategy would cost $4,160.00 a year. You better hope your market timing skills are sharp or you may be out of business by year end. This is the general story for most novice traders. They rack up excessive trading fees and chronically underperform the passive investor that does absolutely nothing during the same time period except collecting dividends.
How lowering your investment expectations for quick profits can improve your returns?
Lowering expectations for quick profits can also help you pick better stocks or make use of the superior investment vehicle called ETF. Generally, the stock that gets you excited and fired up, will underperform compared to a conservative, boring company with a history of stable earnings and dividend growth. The trick is to learn that the stocks that do not get you fired up are the ones that should be getting you excited. I'd rather invest in a restaurant, a furniture store, a milk producer/ distributer, a farm, real estate, an eye glass retailer or a linen and laundry provider, then an 'analytical diagnostics company focused on corporate value branding technology.' If you cannot grasp what the company does from the company profile, there are probably better opportunities out there.
What is the advantage of investing in simple to understand business?
A main advantage of a simple to understand business is that it's easy to have conviction in holding through all the crazy mood swings of the stock market. For example, no matter what the economy or stock market does, people who need to wear glasses will still have to use their pay check from work to buy new eye glasses every few years, they will continue to put milk in their cereal every morning and have cheese on their pizza. Look at how Warren Buffett invests in old boring companies like Cola-Cola. Try holding to such stocks during a nasty correction and see how easy you sleep at night.
A rewarding investment experience can be accomplished by lowering expectation, embracing patience and investing in small, boring, and easy to understand businesses that have a record of steady earnings growth. That is the secret of stock investing as a means of achieving financial freedom.
