Guest Post – 3 Tips for Investing in the Stock Market (and How I Made $30,000 Since the Start of the Year)

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What’s up everyone!

How’s your weekend going?

It’s going to be a SPECIAL post today, courtesy of our friend in the nation’s capital- Light Beam.

You know Light Beam duncha?

He who works in our federal treasury department – pulling all the strings and greasing all the wheels that make our country tick.

I managed to grab him away from preparing our federal budget to bring you guys a tantaliZING guest post on investing in the stock market.

Why Light Beam you ask?

Well, he’s only made about $30k in stocks, since the start of this year – a phenomenal achievement off a relatively small base.

The guy walks the talk, constantly PEPPERING us with his stock picks and recommendations (our Whatsapp chat is filled with them), so what better way than to share with everyone how he did it.

Take it awayyyyy Light Beam:

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Hiya all – Light Beam here – The Frugal Samurai has kindly asked me to guest post for him this weekend on my top three tips for investing in the stock market.

Where the samurai cuts through the housing market (starts humming “kungfu fighting”), I am all about stocks (just can’t deal with tenants/agents).

The broader ASX and the US markets have performed extremely well in the first three months of 2019.

So how do you get into stocks to ensure you do well and achieve your financial goals?

Have your investment goal in mind

Just like anything in life – whether it’s your mate’s Tuesday poker game in a garage, your next sunday soccer showdown or your finances – it is important to know your goals to determine your optimal strategy.

As with all investments, there’s always going to be a level of risk, but without a clear goal in mind, you could be subjecting yourself to unnecessary risks.  

For me, most equity investors can be grouped into two categories – growth or income (a third could be speculators or day traders…..more on that later).

Growth

These investors tend to have a longer time horizon – investing in businesses with growth potential over the next decade or two. Contrary to popular belief, not all companies grow on the stock market, neither do all companies follow the economic cycle.

But if you do happen to hit the right growth stocks, the returns can be very rewarding. Two examples from the ASX (Aussie stock exchange) are:

Magellan Financial Group (ASX: MFG, a fund manager) – Annual return of 61.1% – $20,000 ten years ago would now be worth $2.3 million.

Altium (ASX: ALU, a tech company) – Annual return of 59.8% – $20,000 ten years ago would now be worth $2.2 million.

Editor’s note – “FAAARRRRRRKKKKKKK”.

These stocks easily outperform any other asset classes over the respective period – and with shares, there’s minimal upkeep costs.

Income

These investors (typically mum and dad) invest in equities for dividends – a generally consistent source of income at pre-determined periods.

There are tax advantages with this approach, and in this current environment of falling house prices and low interest rates, it offers a competitive yield.

In fact, the biggest gain from this approach is to reinvest those dividends in DRPs (dividend reinvestment plans) which allow you to use the income to purchase more shares.

Given its compounding nature – over time – this can generate a significant portfolio and dividend flow.

I split my portfolio into both camps – growth stocks I can keep (ie. APX, ALU, BIN, RMD, NUF) and add to until I retire and the income stocks (ie. AWC, any of the banks, WPL, GEM, WAM) provide me with a good source of secondary income.

So find the reason why you are investing in equities and don’t lose sight of it.

Know the business you are investing in

Now what I’ve said above sounds simple enough – but how do you know which stocks to pick once you have settled on a strategy?

Well for either strategy – you want a business that is either growing, or is generating positive income.

Which is a fancy way of saying a successful business.

Analysts and smartie pants at Macquarie Bank (Aussie Investment Bank) will give you all sorts of fancy charts, P/E ratios, price targets and recommendations, but at the end of the day, the best judge of any business is you.

A good example is retail.

If you are investing in retail, think about whether you have ever shopped at that store, did you have a good experience, would you come back again, how does the store present itself?

Many years ago, I was a frequent shopper at Myer, but I could see with my own eyes it was a dwindling business.

I would walk in and never be greeted by a sales person, when I ordered something online, the wrong product turned up, in fact the only times I ever shopped there was when things were heavily discounted.

Fast forward a few years and unsurprisingly, Myer share price has gone from $2 to around $0.50. It’s been a constant favourite for short sellers and I can understand why.

On the other end of the scale…

Take Afterpay – the ‘buy now, pay later’ scheme.

They are everywhere and with the credit card crunch, more and more millennials are attracted to these schemes.

You only have to walk through your local Westfield or do some shopping online to see how many retailers they’ve partnered with.

For this reason – I tend to not invest in industries I don’t understand – mining, energy, infrastructure.

But I have invested heavily into the tech sector – for example, I bought into Appen (ASX:APX) earlier this year.

The company specializes in the development of machine learning and artificial intelligence, a sector which I believe will grow over the next decade.

AI will affect everything from driving to education in the next decade and I see a lot of growth potential for the sector.

The company recently reported huge increases in their earnings last year, and the share price has doubled since January 2019.

Have a long term view

Everyday you flick through the papers or listen to TV/radio – top movers and shakers on the ASX are being thrown around and you wonder, why don’t I have shares in that penny mining stock which has gone up 500% over the last week.

Then you hear that your friend’s uncle Bordan Jelfort (editor’s note – laugh out LOUD) is a day-trader and has been killin’ it.  

In actual fact, what day traders are trying to do is to predict short term sentiment, or what a subset of the market is thinking.

Imagine you had to guess survey results or political polls for a living, it’s extremely difficult.

However having a long term view cuts out the guesswork and the variance of the market.

Whether or not you are an income or growth investor, the key is to focus on your holdings over a long term period.

I know many people who bought into A2 Milk or Afterpay, made 30% and thought “you beauty”.

They thought making that quick buck was the end game and could then flip those profits into finding another A2.

That task is not easy.

At the end of the day, if you invest in a quality company which is generating positive and growing returns, the share price should be able to weather any macroeconomic shocks.

In fact, if you believe in a business model and see short term falls in the price (because of negative sentiment from the market), this is actually a great opportunity to top up your holdings.

So my advice is, don’t get caught up in the daily movements of prices, know your strategy and do your research, analyse the fundamentals of the company and then hold on tight for the ride.

Thanks again Frugal for letting me guest blog. Back to you!

(Disclaimer: this is not the giving of any financial advice – general advice only – seek independent financial advice)

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WOW.

Loved it, absolutely loved it.

Most of Light Beam’s advice is so simple and common sense right?

Have a long term view, walk around your local shopping centre, have an end goal in mind – so simpaul…

So why doesn’t EVERYONE do it if it’s so simple?

Because common sense is one of the rarest investing attributes in my opinion.

Horses for courses, there are a million ways to make money and to invest in the share market.

Buuuuuut you could do worse than listen to some of that gold Light Beam just dished up.

Thanks again Light Beam!

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P.S. As Light Beam has stated, everything here is general advice and opinions only… please don’t come back and say you followed the advice of a friend of a friend of a friend’s personal finance and development blogger’s… friend… that’d be an awkward conversation.

P.P.S Contact me if you are keen on doing a guest post, it’s so easy, so simpaul!