3 Simple Strategies to Make Money in the Stock Market
While I cannot claim to have made millions in the stock market, I can say that investing in stocks has improved my financial health and has granted me a level of flexibility and comfort that I very much appreciate. Rather than guarding this knowledge, I try to educate others on effective stock market investing strategies in hopes that they can be empowered and improve their financial health.
If you want to make money in stocks, you first need to know Warren Buffet’s two rules for investing:
- Don’t lose money.
- Don’t forget the first rule.
While seemingly simple and satirical, these rules emphasize that the whole point of investing is to get a higher return on your capital. If you expect less than a 4% gain, then you would be better suited to buying bonds or utilizing high-yield savings accounts.
So before discussing how to make money in stocks, we need to ask: how do you not lose money?
The best way is to avoid three common mistakes made by everyday investors…
Losing Strategy #1: Emotional trading
The stock market is inherently an emotional arena — there are buying frenzies and selling panics. There is euphoria and there is despair. The key to all successful stock market investors is to remove emotion from the equation. Find a system, make a plan, and stick to it.
Being emotional in the stock market can cloud judgment, leading to rash decisions based on fear, greed, or pride rather than careful analysis and rational thinking. For instance, revenge trading occurs when an investor makes impulsive decisions in the stock market, attempting to recover losses quickly without a strategic plan, driven by frustration and desire for redemption after a bad trade. This emotional response can significantly undermine an investor’s potential for success, turning a temporary setback into substantial financial loss.
Losing Strategy #2: Doubling down on losing stocks
Imagine this: You buy Coinbase stock in 2021 for $300 per share and it promptly drops to $200 — what do you do? You buy more of course! You don’t want to eat your loss and admit defeat, so you double down and pour more money into the stock. But the stock steadily keeps falling. Now it’s 2023, and Coinbase stock is trading at $35. You reluctantly sell for pennies on the dollar of your original investment.
This happens way too often among amateur investors, including myself. I have since trained myself to avoid the temptation entirely. Why? Because you don’t want to lose money! If you have a losing stock, cut your loss and run! There may be a reason to hold, but most certainly it’s not wise to add more money to a stock that’s dropping.
It seems intuitive to sell your winning stocks (capture the gain) and buy more of your losing stocks (get in at a better price), but this hardly ends well. You have to separate what feels intuitive from a solid system for investing.
Schwab Article: 4 Reasons To Sell Your Losers
Losing Strategy #3: Trading options
There are too many Robinhood horror stories about people losing all their money on options, don’t let that be you. Options are luring because they are lucrative. Like a casino, you can 10x your money in a day through sheer luck. But also like a casino, the house usually wins.
Don’t get me wrong, you can make money on options. Nancy Pelosi does it often. However, it generally involves complexities and technicalities beyond what the average retail investor might be prepared to tackle. So, my advice: don’t consider options trading as an investment, it’s more of a gamble.
MIT Article: Retail Investors Lose Big on Options
Alright, now that we got that out of the way, let’s discuss what you should do. Here are three ways to make money in the stock market…
Winning Strategy #1: Buy and hold index funds.
While boring, this simple strategy has produced more wealth in the world than anything else. Historically, the U.S. stock market has increased by 10% annually, which means it doubles every 7 years. The compounded returns and dividend payments over decades have delivered impressive results.
One reason this works is the 80–20 principle. 80% of stock market returns typically come from 20% of stocks and it’s very tough to figure out which stocks those are going to be, so it’s best to buy the whole basket. The vast majority of hedge funds do not outperform the index and they have every trick and resource at their disposal.
Article: Warren Buffett once bet $1M that he could beat a group of fancy hedge funds over 10 years
The best way to do this is through dollar-cost averaging. This means regularly investing money into the stock market, such as $100 from every paycheck. This allows you not to worry about timing the market but having a system to consistently invest and hold for years to come.
My index fund picks: SWPPX, VOO, or VTI
Winning Strategy #2: Invest in what you know.
Is it possible to have an edge on Wall Street? I tend to agree with Peter Lynch and say that it’s not only possible, it’s plausible. Peter Lynch was a fund manager from 1977 to 1990 and doubled the return of the S&P 500 simply by applying the strategy of “invest in what you know.”
This strategy is effective because, as consumers, we’re aware of which products are in demand and how people are allocating their spending. This is why I bought Amazon stock in 2012, Netflix stock in 2015, and Chipotle stock in 2017.
In my experience, this approach proves successful roughly 80% of the time. Occasionally, even companies with outstanding products have stocks that stagnate, such as Honda Motor Company. And other times, stocks become so excessively hyped that they turn into poor investment choices, such as Coinbase or Peloton.
This strategy adds to the joy of investing by putting money into companies and products that you believe in. Don’t go overboard, but I suggest that you allocate a portion of your portfolio to something you know and believe in.
Winning Strategy #3: Momentum trading.
During the Great Depression, while many Americans faced financial hardship, a young stock broker named Jesse Livermore was amassing a fortune in the stock market. When asked about the secret to his success, he replied: “Stocks are never too high for you to begin buying or too low to begin selling.”
What he implied by this statement was that stocks that go higher tend to keep going higher and that stocks that go lower typically keep going lower. Although this isn’t universally true, you can build a profitable system by buying momentum stocks in a bull market.
This is why I regularly like to check the 52-week high list. These are winning stocks that are making new highs and typically will attract more investors and thus continue their rise.
This is the most risky and technical of the winning strategies, but I wanted to share it nevertheless. If you decide to focus on momentum stocks, it’s very important that you set a stop-loss. This is a price trigger that will alert you to sell the stock if it goes too low. Remember that it’s better to take a 5% cut than a 50% wipeout.
So there you have it. There are no secrets, just principles and disciplines for long-term capital appreciation. Avoid the common pitfalls and embrace the strategies of success. Best of luck! 📈
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