How to Invest: Stock Market Strategies
Over the years, I picked a few big winners (10-baggers) as well as made bone-headed mistakes resulting in painful losses. In this article, you will learn how to invest and I will provide stock market strategies. In addition, I will also outline traps to avoid to minimize costly mistakes.
Thanks to my Dad, I have been participating in the stock market nearly 25 years. He encouraged me to open my Roth IRA retirement account as soon as I started earning money.
As a disclaimer, investments can lose money and thus may not be for everyone. If you prefer to have others manage your investments for you, reach out to a financial advisor for professional advice.
How to Start … and what the heck is a 10-bagger?
Peter Lynch, one of my favorite investment authors, coined the “10-bagger” term. It is when you experience a 10-fold gain of your investment. As an investor, this is a thrill similar to hitting the walk-off home-run.
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If you are the type that likes to research, I would recommend Peter Lynch’s books Beating the Street and One Up on Wall Street.
Lynch has various strategies that I have followed throughout the years. Two key ones that stand out for me are buy what you understand and always do your homework.
His books provide foundational guidance and give you the confidence to start investing in the stock market.
What accounts should you start with?
For those that have a corporate job, you may be most familiar with retirement accounts such as the 401k or Roth 401k. Most companies will have you utilize a major brokerage like Fidelity or Charles Schwab.
There are other tax-advantaged accounts such as Roth IRA, 529 College Savings Plan, and Health Savings Account that each have their own unique benefits.
If you need help to understand the various accounts and how to prioritize your investments, I cover this in the article Strategies to Manage your Money and Grow your Nest Egg.
Beginner Level Strategy
This is for people who want the ‘easy’ button. Outside of contributing money periodically into these accounts, just sit back and let it grow. This approach requires minimal work upfront as the options are straight-forward.
Exchange-Traded Funds
Historically, the stock market has averaged 10% gain annually. You can pick an Exchange-Traded Fund (EFT) that mirrors the gains of the stock market. A good example of one is SPY which follows the S&P 500.
Ideally, ETFs are best suited for those that have many years before retirement and can tolerate both the ups and downs of the market.
Here is a list of example ETFs from thebalance.com. Personally, I have investments in SPY and QQQ (Tracks 100 largest Nasdaq Stocks) from this list.
Target-Date Funds
Many retirement plans offer Target-Date funds. Simply choose the target fund corresponding to your projected retirement date like 2040 or 2050.
The biggest benefit of Target-Date funds is that the risk tolerance changes over time. This means the fund becomes more conservative as it gets closer to the target date automatically shifting to lower-risk investments like bonds. This helps limit losses and shields your nest egg from big drops.
Another good investment account for Target-Date Funds is the 529 College Saving Funds. These funds help maximum investments for your kids when they are young and minimize risk as they get closer to college. For 529 strategies, see the article Beginner’s Guide to 529 College Saving Plan.
For examples of Target-Date Funds, check out various options from the US News site.
Intermediate Level Strategy
This level of investing requires research and puts you more into the driver seat. You will select mutual funds that focus on a particular area of the stock market.
Mutual Funds
Mutual Funds are comprised of a basket of stocks in a particular industry or region, which can greatly overperform or underperform the stock market.
Examples of Industry-based mutual funds are Technology, Large Growth, Mid-Cap, Health, and Semiconductors. Location-based mutual funds comprise of the best stocks in a particular region like Emerging Markets, Asia-Pacific and Latin America.
Picking a good mutual fund could involve multiple factors like entrusting in a reputable fund manager and targeting a rapidly growing segment of the market.
When looking at mutual funds, also choose ones with low management fees. Over time, management fees can add up especially during down years. The US News site has examples of mutual funds to help you get started.
Advanced Level Strategy
This highest level of investing has the most risk however greatest upside. You will pick out single stocks that can easily beat the stock market gains such as investing in the 10-bagger (1,000% gain). Take a look at the best performing stocks over the last decade (marketwatch.com).
As a warning, it can also result in losing the entire investment if the company goes bankrupt. I have had a fair share of losers over the years resulting in bad losses.
Picking out stocks requires time and research. If this does not sound appealing to you, it is absolutely ok to stick to the beginner or intermediate level investing and let others handle your investments.
Picking Out Stocks
Stock Strategy 1 – Do your Homework
With all public companies, there is a wealth of materials freely available to you such as annual reports, letter to the shareholders, and financial presentations. Typically, you will find this under the investor section on the company’s website.
In addition, there will be analysts that follow these companies and make recommendations whether to buy, hold or sell the stock. Utilize sites like Yahoo Finance to read up on the analyst recommendations.
Do your Homework Illustration:
Back in the early 2000’s as Superhero movies were becoming popular at the box office, I did my homework looking into Marvel Entertainment. The decision point for me came after reading through the annual report and seeing the long-term potential. Marvel outlined an impressive list of movies they planned to release in the future.
It was an easy decision for me to purchase the stock and my only regret was not purchasing more. Disney ended up buying Marvel and this turned into a 3-bagger for me in a short period of time.
Stock Strategy 2 – Look for Disruptive Technologies and Innovative Ideas
As one of my passions, I like to research how new technologies can make peoples’ lives better. If it has mass appeal and can disrupt the current process by doing things better, these are the companies I love purchasing.
Disruptive Technology Illustration:
Intuitive Surgical (ISRG) created the “daVinci Surgical System” to help assist doctors using a minimal invasive approach. The technology helps doctors be more precise with surgeries resulting in faster recovery times for patients.
Before purchasing ISRG, I asked my siblings who worked at hospitals for a first-hand review of this technology. They confirmed the da Vinci systems were a hit with doctors and patients alike. A few years later, this became one of my first 10-baggers!
Stock Strategy 3 – Buy what you know
One of Peter Lynch’s strategies involves buy what you know. On top of this, monitor what you, your family and others are spending their money on.
Buy what you know Illustration:
My family shops frequently at Costco and loves the experience (see article Unlocking Additional Savings at Costco). Our local store is always busy no matter the day or time. Sadly, I did not purchase Costco stock which resulted in missing a 3-bagger.
Fortunately, I hit other 5 and 10-baggers with Netflix and Amazon by investing in them early on. Through the years, I saw my family’s spending habits increase with Amazon. Also, Netflix made it easy for my family and friends to cut our expensive cable bills and move into the digital streaming world.
Traps to Avoid
Although it is way more fun to talk about the winners, I will highlight the traps to avoid to hopefully minimize costly mistakes in the future.
Trap #1 – Be careful not to get caught in the Hype
Stocks can appreciate in price quickly, especially driven by the frenzy of investors. Thus, the company can become overvalued with no way to go but down. One way to assess whether a company is overvalued is comparing the market capitalization against its peers.
Hype Illustration:
Back in the early 2000’s, the Palm Pilot was the hottest phone on the market. The Palm company IPO’d and quadrupled to an astronomical $50 Billion market cap in a short period of time.
Not wanting to watch from the sidelines, I purchased the stock at the height before it collapsed nearly losing all my investment in this company.
Trap #2 – Don’t catch a Falling Knife
The market can be merciless for a company falling out of favor. This may be due to company fundamentals eroding, competition chipping away or poor management.
As your stock falls, sometimes the best advice is to cut your losses and sell. There have been times where I have wanted to double-down anticipating a bounce back in the future. This is the same gambling excuse of continuing to double-down on ‘red’ in roulette thinking your luck has to eventually turn.
Falling Knife Illustration:
There have been many market leaders that faded away due to losing its competitive advantage or not innovating fast enough. To name a few: Sears, Circuit City, and Toys R Us failed to adjust with the times and allowed competitors to catch up.
Trap #3 – Avoid letting your emotions cloud your judgement
Selling Too Fast or Too Slow Illustration:
Sometimes you can become too impatient when investing over the long haul. I have had times where I sold a turnaround stock too quickly as I was anxious to sell on any uptick. Other times, I had a hard time selling a winner even after seeing the company fundamentals deteriorate, industry shifts or stock becomes overvalued.
OLED turned into a 10-bagger for me and is a perfect example of an emotional rollercoaster. This company has developed next generation screen technology that utilizes less energy and has more vibrant colors than the previous LCD technology. This is considered the premiere option with wide adoption for mobile phones, TVs and other devices.
As you can see on the chart, OLED has had wild up and down swings testing my emotional fortitude. At times, I couldn’t imagine selling shares as it rocketed past $200. However after painfully falling below $100, I was willing to dump shares on any rebound in price.
Managing your investment portfolio
Now that you have learned stock market investment strategies, here are a few tips to manage your stock portfolio over the long-haul.
Portfolio Strategy #1 – Invest for Long-Term
When making a stock purchase, look for companies with strong fundamentals that you want to hold for the long-term. This will help you avoid flash-in-the-pan companies (Hype stocks) as well as purchasing stocks for the wrong reason (Catching a falling knife).
Portfolio Strategy #2 – Diversify
Choose a small number of stocks that you can actively manage. Typically, this means having 5-10 stocks in your portfolio. If you pick a new stock, get rid of the worst one to keep the same number of stocks in your basket.
On the flipside, avoid having too few stocks and not diversifying. If you have a big winner or multiple winners, rebalance occasionally to prevent a huge fall if that company tanks in the future.
Portfolio Strategy #3 – Evaluate and Adjust Periodically
As you get closer to retirement, it may be time to shift to more stable investments. Also, if you encounter a busy period in your life like having kids or change to a new job, switch over to ETFs or mutual funds as there is less work involved.
A look back at my Investment Performance
From my retirement portfolio, I compare 3 accounts against the performance of the S&P 500 from 2013 to 2018. Over this time, the S&P 500 had 4 positive years (+29%, +11%, +10%, +19%) and 2 negative years (-1%, -6%) resulting in overall 10.3% average gain over this time.
Retirement Account Mix
| 401k Retirement Account | Beginner Level: ETF mirroring S&P 500 ~ 50% and Target Date-Fund ~ 25% & Intermediate Level: International-Focused Mutual Fund ~ 25% |
| Wild, West West Stock Account | Advanced Level: 20+ Individual Stocks of varying investment size. Biggest holding nearly 15 times larger than smallest |
| Managed Stock Account | Advanced Level: Fewer than 10 Stocks. Biggest holding 3 times larger than smallest |
Accounts Performance Highlights
| S&P 500 | 401k | Wild, Wild West Stocks | Managed Stocks | |
| Best Year | 2013 (+29%) | 2013 (+26%) | 2017 (+58%) | 2017 (+59%) |
| Worst Year | 2018 (-6%) | 2018 (-11%) | 2018 (-3%) | 2018 (-3%) |
| Annual Average Gain from 2013 to 2018 | +10.3% | +10% | +15% | +25% |
401k Account Performance
The 401k account ended up averaging the same gains as the S&P 500. This was expected due to the majority of the portfolio (75%) consisting of ETF and Target Date-Funds.
Wild, Wild West Stock Performance
I call this account the wild, wild west as it does not follow the strategies I outlined. The performance varied year-to-year against the S&P 500. Without the stellar +58% gain year in 2017, this account would be hard-pressed to beat the S&P 500 performance over the 6-year period.
The main deficiency involves not rebalancing the largest holdings (top 3 stocks consist of 50% of the entire account) and not closely managing the rest of the stocks.
Fortunately this account has been successful. It was the 2nd best performer averaging +15% annual gain.
Managed Stock Performance
I started this account as a clean slate in 2013. Thus, I was able to implement all of the strategies previously recommended.
The managed stock account has been consistently the top performer every year even during down years for the stock market. Due to the smaller number of stocks, it is only focused on companies with the strongest fundamentals, focused on long-term investing, and properly balanced (all stocks within 1-3x range of each other).
The managed stock account would make Peter Lynch smile by Beating the Street (+25% average annual gain)! It is an aggressive account and the true test will come when a major downturn or crash happens in the future.
Summary
You have learned how to invest and stock market strategies. Using these strategies, hopefully you will be able to construct a robust portfolio that beats the street over time.
My overall portfolio is diversified however tilted to the higher risk, higher reward side as I have many years to go before retirement. I have many nest eggs ranging from retirement accounts to 529 Savings Plan to Health Savings Plan. Each has its own goal with varying balance of stocks, ETFs, mutuals funds and target-date funds.
Ultimately, my investment goal is to Beat the Street year in, year out. I hope you can do this too as well as experience the thrill of picking the next 10-bagger!
Steps for Success
- Start investing in accounts that make sense for you. For ideas on prioritized approach, see Strategies to Manage your Money and Grow your Nest Egg.
- Determine your risk tolerance and decide whether you are beginner, intermediate or advanced level investor.
- Employ strategies of Do your homework, Look for Disruptive Technologies and Innovative Ideas, and Buy what you know. Avoid Traps like Hype stocks, catching a falling knife, and letting your emotions cloud your judgement.
- Manage your investment portfolio following principles of Invest for Long-Term, Diversify, Evaluate and Adjust Periodically.
Disclaimer: DadMBA is not a financial advisor. With any investment, you may lose money. Do your independent research and rely on your financial advisor for professional advice. This article’s purpose is to provide general education and awareness on the topic of stock market investment strategies.
About DadMBA: Through his schooling (he does have a MBA) & more importantly being a Dad, he has provided practical advice to family & friends on finances & other life topics. He loves helping others thus the creation of DadMBA.
