6 awesome ways to become rich in stock market: Here is how you can build a profitable portfolio

By Peter Douglas

The principle of successful equity portfolio management is very simple: buy stocks that go up, and sell them when they’ve gone up. However, putting that into practice is difficult. We’ve collected a few nuggets of experience and wisdom here, some obvious, some not-so-obvious, that’ll help you think about how you invest and how you shape your portfolio:

1. First, there are no geniuses in the business world. There is hard work, experience, and not a little luck. So, don’t make big bets early in your investment career; you’ll make mistakes, learn with small amounts of money and lower risks until you’ve gained that experience. Don’t trust anyone who says that they are a genius, and don’t invest in a stock because you think the promoter is a genius. Follow investment professionals with long careers and learn from them.

2. Stockmarkets have cycles – short term, long term, and generational. Investing styles change (value, growth, momentum). Decision and research technology changes (from reading yesterday’s newspaper, to machine learning and big data). But whatever the environment, whatever technique you find most useful, always remember that the price of a stock, or the level of a market, is determined by a simple, visceral battle between buyers and sellers. Buyers anticipate profits (‘greed’). Sellers feel that the risk of holding is too high (‘fear’). Fear and greed are eternal. They’re even inherent in computer models, which are either programmed to reflect human expertise, or reacting to human activity. A really experienced investor is always finely tuned to the changing balance of fear and greed affecting them.

3. Most of us have subliminal (or not so subliminal!) feelings and opinions anchored to the history of our investments. But investment is only ever in the future. It starts now, and ends only when you realise the investment (in part or in full). What you paid for an investment, whether you’ve received dividends, why you originally decided to invest… none of this matters. They are irrecoverable costs or experiences. This principle of sunk cost is one of the clearest and most useful investment guidelines you can apply.

With a blank sheet of paper, today, right now, would you want to hold this investment? Is it a good investment from this point on (and, in a portfolio context, does it justify displacing other potential investments)? This is one of the hardest rules to follow. We don’t want to acknowledge a loss-making investment. We may want to sell an investment that’s done well and put cash in the bank, even though it is still a great proposition. We might remember how smart we felt when we bought it, or feel we put so much research effort in we should hold it. We’d like to prove we’re right. We’d like to prove our colleagues wrong. But each time you review your portfolio, look at it as if it were a brand new portfolio, judge its merits accordingly, and you’ll be a better investor.

4. You can’t control when the market will give you a return on your investment. You have to be invested. Staying on the sidelines waiting for the right moment, doesn’t work. There’s evidence to suggest that up to 40% of your annualised return over a 10-year period comes from only 10 trading days, and that 2/3 comes from only 20 trading days… but you don’t know which are the “big win” days until they’ve happened.

Similarly, if you have an opinion about an investment, unless you express that opinion by owning the stock, it really doesn’t matter if you’re proved right. You have to be there. This may seem a really obvious comment, but many investors do try to time their entry and exit into the market. Most professionals would prefer to stay invested.

5. Anything that you can measure is in the past. As an investor, you are interested only in the period from now, until the moment you exit the investment – i.e., the future. Of course it’s impossible to quantify the future! But do not place too much reliance on data, on history, on quantified risk models; anything that relies on measured experience can only tell you about the past, about history. Conversely, qualitative information has a better chance of giving you pointers to how the future might look. For example, reading up on the board of directors of a company, on the outlook for its industry, or newspaper articles, can create a holistic picture of what the company is like; this may well feel like a subjective opinion, but a well-researched subjective opinion is likely to be more insightful than a spreadsheet full of historic data analysis.

6. And finally, many of our members are telling us that this is the time to move to active management – picking your stocks carefully and creating a thoughtful portfolio. Indexed investment has become huge, and perhaps now the dominant influence on markets (by some measures, more than $4 trillion is invested in stocks through index investment). There are good reasons for this, and certainly for many investors this is the most appropriate way to buy stocks. But an index fund will buy a stock just because it’s in the index, without regard for value or prospects. That $4 tn is, in effect, dumb money, and is creating huge value distortions in stocks globally. For investors that have the ability, this is an excellent time to be picking stocks carefully, or investing in active mutual funds. Invest wisely and with common sense!

(The author is Director, CAIA Foundation)