Strategies to help you win in the stock market

January 25, 2011

While there are never any guarantees of success when it comes to the stock market, even nonexperts can improve their odds of coming out ahead by adopting and sticking with some time-tested strategies.

Key Points

While there are never any guarantees of success when it comes to the stock market, even nonexperts can improve their odds of coming out ahead by adopting and sticking with these time-tested strategies:

1. Diversify your investments. Allocating your dollars among different investments-diversification-is critical to successful stock market investing. Your goal should be to invest in a range of assets that won't all be affected the same way by external events. Diversify your purchases not only across different companies, but also different industries, geographies, and types of investment.

3. Move against the herd. "The worst course an investor can take is to follow the prevailing economic sentiment," says noted investment author and Wharton School finance professor Jeremy Siegel. History has proven that the economy is cyclical and that stock markets move higher in advance of a recovery. To gain the returns that will be generated, you must move against the herd and make choices now in anticipation of improved future conditions.

4. Be realistic about price volatility. Stock prices often move erratically. The price of a good investment can drop below your purchase price for reasons having nothing to do with the strength of the underlying business.

So don't rush to dump your investment if the price drops. Share prices of high-quality companies can recover, and often move even higher.

5. Celebrate base hits and home runs. In recent years, the stock of Apple Inc. has soared with its string of blockbuster products such as the iPod, iPhone, and iPad. Shareholders who held the stock from December 15, 2003, to December 15, 2010 realized a total gain of 1,488%-clearly a home run.

In contrast to such home run stocks, many solid companies produce moderate earnings growth and steady price appreciation-base hits. Ball games often are won without the thrill of a single home run, but with a string of base hits. The same applies to winning in the stock market. Don't let the pursuit of home-run stocks cause you to neglect the importance of steady, modest gains.

6. It's OK to be wrong sometimes. Don't fall into the trap of believing you always have to be right. It can cause investors to panic and abandon a thoughtful, long-term discipline and keep others forever on the sidelines.

Even the best analysis of a company and its financial statements can't guarantee that it will be a winning investment. Some companies may not live up to their promise. You may have a few strikeouts but these can be more than offset by a series of base hits and the occasional home run.

The secret, like so much else in life, is to learn from your mistakes and move on. If you can do that, you greatly improve your odds of success as a stock market investor.

The author is principal of Abunda Financial, Larkspur, California. The ideas expressed in this column are hers alone and do not represent the views of Medical Economics. If you have a comment or a topic you would like to see covered here, please e-mail medec@advanstar.com