The 10 principles of stock market success
November 09, 2023
3 minutes to read
Stock market investments can make you a great deal of profit, but they also involve risks. Fortunately, investing is not about sophisticated models, large amounts of money or expensive advisors. Quite the opposite. Simplicity, commitment, perseverance and trust are the pillars of every success story. Our 10 principles will tell you how you can achieve success on the stock market and lay the foundations for profitable investments.
1. Avoid frequent market entries and exits
Investors often want to buy and sell their shares quickly. They are impatient and act impulsively. Because they are trying to avoid the bad days, they often miss out on the best days. This expensive habit is the main reason why there is such a wide gap between the long-term average return of most stock market indices (around 7% per year) and that of investors (2 à 3%).
However, there is one exception: stock market novices. Don't buy your first shares in one go. Buy some once a month, for example. That way, you avoid the risk of buying everything at the top of a cycle.
2. Don't hold on to stocks that are not performing well
Cut your losses and let your profits run. Even though this is some of the best advice in the world, it is still completely ignored by many. Investors often think that if they wait long enough, a share that is not performing well will still yield a profit. On the opposite side of the spectrum, they tend to sell high-performing shares too quickly for a quick win. This is a shame, because the stock market offers us a unique and (potentially) lucrative advantage: the principle of an asymmetric payoff. If you invest 1,000 euros in a share, you can lose up to 1,000 euros, but you can gain far more than 1,000 euros. Extreme winners will earn you much more than extreme losers can cost you. And isn't that the perfect argument to hold on to your winners?
3. Don't let the news affect your actions
News reports tend to be fickle. One moment, the media report that the economy is doing well. The next, society is completely upended by factors such as Brexit, Donald Trump or China's economic slowdown. A while later, they tell us that all problems have been resolved again. The stock market follows this flow of news: it tends to rise after positive news and fall after negative news.
The end result, however, remains the same: in the longer term, the stock market stays at the same level. We also have to bear in mind that 95% of all news is useless as stock market guidance. By focusing on news reports about the shares in your portfolio rather than the general news, you save yourself a lot of worry about the price of your shares.
4. Do not compare shares with their past value
The value of shares fluctuates over the years. This makes sense, because the market is changing, just like the product itself. A share from 2012 will therefore look completely different today. This means you should never buy shares because the price has reached its lowest level in years, as that does not mean that they are more attractive now. Bear in mind that a price can keep on falling for a long time and such a fall is often accompanied by a consistently poorer operational performance as well.
5. No one can predict the future
"The prices of my shares have risen nicely. Wouldn't it be better to sell everything now, wait for the upcoming crash and then get back in on the cheap?" Or perhaps you hold the opposite view: "The price of this share has been falling for so long. Shouldn't I sell before it crashes completely?" If that is what you think, you may need to revisit our first principle, because no one can be sure whether a crash is coming. Selling your shares in a panic after the slightest change in price is not going to get you anywhere.
6. A cautious investor is a more successful investor
An investor who is committed in the long term, avoids the major risks and sticks to a simple yet effective system in all circumstances will achieve a much higher return than a reckless investor.
It is crucial for an investor to know what they are doing, especially in crisis situations. Someone who no longer sees the big picture may let themselves be guided by speculative newspaper headlines. They may be inclined to sell in a blind panic and turn their back on the stock market. Or they may resort to taking risks to make up for the losses they incurred. Our 4th principle, however, states that it is better to focus on the shares themselves rather than the news. A cautious approach based on a controlled system with buy and sell limits will yield a much better result in the long run.
7. Trying to beat the clock is risky
Any investments that are trying to beat the clock are extremely risky and should be avoided if you don't have the necessary experience and knowledge. This group of high-risk investments certainly include options or turbos, but shorting as well: selling shares you don't own in the hope of buying them back later at a cheaper price. And of course we have to mention the biggest risk of them all: borrowing money to invest it. It is important to remember that at some stage, you are going to have to pay back your loan.
All these activities assume that the price will move to a certain point in the right direction within a limited period. You are therefore left at the mercy of pure luck. Leave this type of activities to speculators. Investing in shares is interesting enough without these risky endeavours.
8. Only buy a share after careful consideration over a period of time
Most investors tend to be more concerned with selling than buying shares, but actually, it should be the other way around. Selling is a no-brainer, really. If a limit has been exceeded in your investor model or – more exceptionally – a certain company no longer meets your initial requirements, you sell. Otherwise, you don't.
Buying is harder. There is no golden rule for picking shares. It is a mix of calculations and assumptions and there are no guarantees of success. You should try to consider the pros and cons of a particular share for about 3 months. Be critical. And if after 3 months of careful consideration, the share is still just as attractive, it is probably a good match.
9. Don't blindly adopt other investors' convictions
The stock market world is extremely conformist. In order to feel part of this world, investors automatically engage in herding behaviour. This quickly obscures any clear thinking. However, the greatest danger lies in the belief that the herd is always right. Surely that many people can't all be wrong? Yes, they can. Quite often the group gets it wrong, and a few individuals get it right.
Of course, you can listen to tips, but don't allow yourself to be convinced too easily. Study the arguments and make sure you are 100% in favour before making the transaction, because that transaction is yours to make. Tips are always based on current information. The following day, the arguments may not even apply anymore.
10. Above all, invest in yourself
Warren Buffett used to say: "You are your most important asset, so invest in yourself as much as possible." And focus most on your personal development, to be precise. Develop your talents. Read, listen and learn. No one can take that away from you. Invest in your wellbeing too. Good investors are happy people, and vice versa. They are optimists who believe in a better future. A pessimist can't achieve a 12% annual return over 20 years. They see danger everywhere, sell far too quickly, and are often too cynical to see the beauty in all the listed companies that are operating in their country.
Remember: not all investors are the same
Although the tips in this article can help you get started, you may still be wondering what investment strategy suits you best. Should you invest in shares that 'everyone' is buying, or is it better to go the opposite way? That’s a smart question, which we try to answer in our blog.