When you own a stock, you’re a partner with an expanding business. With the purchase of a bond, you’re essentially lending the company money and the relationship ends with the payoff of the debt.
Historically—in spite of crashes, depressions, wars, recessions—investing in stocks is more profitable than investing in debt. Stocks in general have paid off 15 times as well as corporate bonds.
Assuming at stock has a 10% return a year, and the Consumer Price Index (CPI) is 3%, that gives the stock a real return of 7%.
By asking some basic questions about the business, you can learn whether it’s likely to grow and prosper, but keep in mind that you can never be certain what will happen. Your greatest advantage is the reward for being right.
Let’s say you’ve found a company. Without relying solely on your intuition, what are some things that you can do to ensure that it has a higher likelihood of being a growing company that will be around for the long term?
Take the stocks and sort them into groups using a measure of value such as market price to book price or market price to earnings. The value stocks would have low price to book or price to earnings (P/E) ratios.
Record the price at the start, usually first day of trading of the year.
Record the price at the end of the year.
Add the dividends paid to change in price to get the total return on each portfolio for that one-year period.
Compare the total return of each portfolio.
In conclusion, don’t rely on intuition alone. Buy stocks you know, do your research, invest only what you can afford to lose and hold for the long term.
Take advantage of what you already know.
The average person is exposed to interesting local companies and products long before the professions.
The best place to look for a great stock, is with the companies you currently use or work for.
Look for opportunities that haven’t yet been discovered.
Ignore short term fluctuations.
Large profits, as well as large losses, can be made in the stock market.