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How to make money from stocks

Peter Switzer
12 March 2019

One of the smartest stock players I know recently tipped that Boeing was a great buy. However, its share price nosedived like its recent plane in Ethiopia and apart from feeling for the poor families who lost loved ones, being who I am I couldn’t help seeing that there was a lesson in this story that newbies to stock investing need to learn.

In fact, the whole event has made me realise that people like me and CNBC’s Jim Cramer have in-built mental filters so when we hear that there’s a bombing in Saudi Arabia, we ponder what will happen to the oil price, the Oz dollar, the S&P 500 index in the US and then the local stock market.

It’s not just a habitual inclination to analyse everything down to the money effects, it’s all about being prepared when a media outlet rings and asks for a comment.

That has been me for near on 30-odd years and now I do the thinking/analysing for our financial planning clients, the subscribers to our Switzer Report and our two funds — the Switzer Dividend Growth Fund and the Switzer Higher Yield fund.

The best portrayal of what I see and how I react is captured in that great ad for Jim Cramer that says “see the world through the eyes of Jim Cramer”. And when he sees cars, he thinks auto sales, GN share prices, etc.

It’s analysis born out of study and experience so I thought I’d use the Boeing incident to give newcomers to investing in stocks some unforgettable rules of thumb.

Before that, look at Boeing’s share price both reacting to the tragedy in Ethopia, the second crash in two years of its 737 Max jet!

Boeing short-term post-crash:

You can see the price slump, which would have worried a recent investor to the stock but now look at the long-term story.

Boeing share price over 5 years:

This is a great company benefiting from the middle classing of the Chinese population, who are travelling like never before, just when all westerners are doing exactly the same.

So what are the investing lessons? Here goes:

1. Invest in great companies exposed to modern market trends. It’s why old media has become a risky bet nowadays, while Netflix has been a winner. Need proof, well, look below at a chart of the TV company over five years:

2. Try to build up to 10-20 companies on your portfolio.

With 10 companies invested equally, you’d only have a 10% exposure to one bad CEO or a dumb government decision. With 20, you only have a 5% exposure. And if one company does an AMP and dives, the other 19 could be having a ripper of a year.

3. Get into different sectors. Those SMSF investors who held only the four banks and Telstra and have been clobbered over the past couple of years, did not have a diversified portfolio. Think about what you use in life and what’s really popular and try to have exposure to the best of breed in each sector. For example, the best bank, the best tech company, the best retailer and so on, which could make up your core holdings. That might involve 80% of your investible money.

4. Keep 10-20% available for up and coming stocks that have a possible big future but don’t be too exposed to these more risky stocks. If it’s 20% of your fund, then maybe have five stocks with 4% of your money.

5. Look into exchange traded funds (ETF) as this can give you wide exposure to stocks at a pretty low cost. Some people buy an ETF for the top 200 stocks in Australia and then buy one that gives them the top 500 stocks in the USA. And they can even invest in tech, financial, health sector ETFs.

6. Learn from Warren Buffett that you should be “fearful when others are greedy and greedy when others are fearful.” That is, it might pay to wait for a big stock market crash before you start investing for the long term.

7. Once you’re in the market, history says that time in the market pays off more than trying to time the market. Trying to guess the market can mean you miss big up days, while copping some of the worst days because “no one rings the bell when the bull market is over”, as the old saying goes.

8. “No one ever went broke taking profit” is another great market rule of thumb.

9. Read everything you can as you need to pretend that you’re becoming your own fund manager. You don’t learn how to be good at investing and money making in a day but daily!

10. Ask lots of questions and find someone like me who thinks about this investing stuff daily and soak up as much knowledge as you can. Jim Collins, who wrote one of the best business books of all time — Good to Great — told me that he selected some of the great business brains of all time and put them on his virtual board of advisers. He read all their stuff, watched videos and listened to CDs and that made all the difference.

The bottom line is that you have to become professional. And if you do, you will make money — lots of money — out of stocks.

With Shorten and Morrison racing to the top, Brexit, trade deals and franking credit debates, 2019 has been one crazy political rollercoaster ride! Join me at our Switzer Investor Strategy day in Sydney, Melbourne and Brisbane and learn how to maximise your current and future investments in a politically challenging 2019! Tickets are only $39.00 (valued at $149.00) and are available now. Click here and enter the code “SD2019” to get 25% off.

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