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How to Invest in Stocks AND Make Money

03 Jan 2022

How to invest in stocks and make money | Money Money Home | VI

If you're reading this, you're probably already tired of the way you were making money before.

Making a living out of a job you're not excited about, vying for that yearly promotion just so you can get a small raise, dealing with the office politics – we’re not surprised you want another way out. And you heard investing can earn you some extra money, so you want to learn how to invest in stocks and make money.

Well... before you ask, the answer is yes and no.

Yes, investing in stocks is an excellent way to make money – if you know what you're doing. But no, there isn't a guarantee and profits can only come if you invest the right way.

Let us tell you something ironic.

Theoretically, everyone knows investing is buying something valuable and keeping it until it increases in value with time so you can sell it off. Practically speaking, however, a lot of people ignore this concept altogether.

There is a shockingly high number of "investors" that are focusing only on buying stocks that are cheap without knowing what they really are. All the talk about "value" is forgotten altogether. All these people hope for are for these "cheap" stocks to increase in price in the future. No different from gambling or buying lottery tickets, isn’t it?

They've not really learnt how to invest in stocks and make money from it.

Make money investing like a girl

There's a reason why there are a lot of intelligent people who still don't know how to invest in stocks and make money from it. More than theory and investment knowledge, emotion management plays a big part in becoming a successful investor.

Women are stereotypically known to be the more emotional of the two main genders, whereas men are known to be more rational. That's why for decades now, men have been presumed to be better investors as they are “more stable emotionally.”

Recent statistics, however, have revealed that many female fund managers obtain better returns than their male counterparts in the long run. In fact, LouAnn Lofton wrote a book titled Warren Buffett Invests Like a Girl: And Why You Should Too, which identified three main characteristics women have that make them great investors:

1. Women are more conservative

Women are naturally more prudent with their hard-earned money and tend to avoid making high-risk investments compared to men. Before investing, they also tend to do relatively more research and learn more about the product before making a decision.

2. Women are more patient

According to Lofton, women are less likely to buy or sell rashly due to fluctuations. They are more patient in letting time do its work and allowing the returns of compound interest to snowball over time, especially those who dabble in value investing.

3. Women are more willing to seek advice

Women are not socially expected to carry a strong sense of pride/ego, unlike men. Without this social expectation, they are more open to asking questions and learning from others.

Even if they did make a mistake, they're also generally not afraid of "losing face" and admitting it. After learning what went wrong and rectifying the mistake, they just do better the next time, so they get better returns. 

Invest in stocks and make money... even if you're not a woman

Even though statistics show that women are better investors than men, it doesn't mean you can't make money from investing if you're not one.

There are many schools of thought around investing which we're sure to have made money for a lot of people.

However, there is one that has been quoted to have the lowest of risks and doesn't require you to camp in front of your computer screen 24/7 – value investing. 

What is value investing?

Invest in stocks and make money | VI

You may have heard the term "value investing" before. More than anything, value investing is an investment strategy.

Just like your general concept of investing, value investing tells you to choose a good company and invest in it while the stock price is below its intrinsic value. Then you can "go to sleep," which is basically saying to put the stock aside while you go about your life, and then sell the stock off when it has appreciated over the years.

More than that, however, there are 3 prongs to value investing that are not talked about enough: market, value, and margin of safety.

Market, in this context, is more than just the stock market or stock exchange itself but rather the investing environment which may create "market noise," such as the news and price fluctuations. Do you react to price movements or get influenced by the "buy calls" and "sell calls" in the market?

Value investing encourages one to not only ignore irrelevant market noise, news, or speculations that are created to move the market, but rather, practise independent thinking by choosing a great business, even if it's not the "hot stock" at the moment. Buying and selling of the company's stock should be based only on the company's actual business performance and the reliability of the company's management team.

The second prong is value, or more specifically, the intrinsic value of the stock.

Do not be confused. Price and value are two vastly different things. The "cheap" and "expensive" of a stock should not be dependent on its price, but dependent on its value.

For example, you wouldn't pay $10 for a regular plate of chicken rice at the food court, simply because you know its value is not worth that much. However, if it's selling at $1.00, you know you're getting it for a bargain.

The same goes for stocks.

A $0.50 stock is not necessarily cheap, because its intrinsic value could possibly be only $0.30. Conversely, a stock that costs $100 may have an intrinsic value of $200, so $100 is considered cheap for this stock.

The value depends on the company's business model and future growth, NOT its price.

What is value investing | invest in stocks and make money

The final prong, margin of safety, refers to the "discount buffer" between a company's intrinsic value and the current share price.

A company that is worth $100 and is selling at $100 per share at the moment is considered "fair value." In this case, however, there is no margin of safety, as you are paying exactly the amount the company is worth. You have no safety nets.

On the other hand, a company that is worth $100 but selling at $50 per share, gives you a 50% margin of safety, i.e., a 50% discount and a safety threshold in case of errors or mistakes in calculations.

There is no secret formula in learning how to invest in stocks and make money. The easiest way to do that is to see stocks as businesses, instead of just mere stocks. Ask yourself, what business is it in? How's the business doing? Is the management team doing a good job managing it?

By seeing a stock as an actual business, it is much easier to gauge where the company is heading and whether the business value will increase over time, because if it does, it also means your stock will increase in value.

Sounds easy, right? Learn more about investing and making money from value investing by watching this week's episode of Money Money Home as Daren gets excited investing in a big box of socks while Xianren shows off her latest “vintage investment.” Hint: it's a movie poster!

Money Money Home is an edutainment series that takes reference from Malaysia’s TV programme of the same title.

Savings doesn't make you rich but not having any savings will definitely make you poor. Do you have more money management questions you're looking for answers to? Join our free online masterclass on creating passive income for families and for more tips for money management.

DISCLAIMER

This article and its contents are provided for information purposes only and do not constitute a recommendation to purchase or sell securities of any of the companies or investments herein described. It is not intended to amount to financial advice on which you should rely.

No representations, warranties, or guarantees, whether expressed or implied, made to the contents in the article is accurate, complete, or up-to-date. Past performance is not indicative nor a guarantee of future returns.

We, 8VI Global Pte Ltd, disclaim any responsibility for any liability, loss, or risk or otherwise, which is incurred as a consequence, directly or indirectly, from the use and application of any of the contents of the article.