I’m reading the German Blinkist summary of a book by Beate Sander, using Google Translator. The book is titled “Die besten Aktien findet man nicht im DAX”, which translates to “You won’t find the best stocks in the DAX”.
I’ll use this as an opportunity (see my content creation strategy) to start writing about investing. I’ll go through the summary and write my notes, as reminders of topics that I will later dive deeper into.
So, without further ado, here are my take-away’s from the book.
Indices, Diversification, Sectors, Value Stocks and Growth Stocks
There are different stock market indices around the world (here are the major ones).
There are indices with large, medium and small companies. Smaller companies can usually react better to changing circumstances. They can offer better returns, but also higher risk, compared to bigger companies.
By simplifying a bit, we can say that there are two main types of investors, passive investors and active investors. Passive investors just buy and hold. Active investors spend more time and energy to make their money work for them.
Risk diversification means not concentrating your investments. Buying stocks in different industries/sectors and in different geographies.
The book gives examples of sectors “with a future” since they have a sustainable business model and rely on social, demographic and climatic change. These include, for example:
- the Internet of Things,
- artificial intelligence,
- big data,
- cloud computing,
- IT software,
- online trading,
- healthcare such as medical technology and biotech, and
- renewable energies.
The book then distinguishes between value stocks and growth stocks.
Value stocks are those of large, traditional companies, like consumer goods manufacturers.
Growth stocks are those of younger companies that are growing strongly, for example in the technology sector.
You can either buy individual stocks or invest in stock funds.
Here are some of the most used financial metrics (used for the so-called Fundamental Analysis):
- P/E ratio
- Book Value
- Price/Cash Flow ratio
- Equity ratio
- Earnings performance
- Dividend yield
- Price performance
ETFs and Equity Funds
If you want to cover a large number of countries and industries with individual stocks, you need to do extensive research. In addition to the research time, there are also a lot of transaction fees. You can invest more easily with the help of funds. With a single fund you can get dozens to hundreds of individual stocks in your portfolio.
ETFs, the abbreviation for Exchange Traded Funds, are passively managed index funds that replicate an index, a geography or a sector. These funds are cheap and perform as the index they replicate. There are thousands of ETFs to choose from.
There are also actively managed funds, in which a fund manager makes decisions about how to invest the fund’s money. They charge a higher fee in exchange for the chance of beating the market (i.e. a better performance). for more on this check out this article.
The advantage of funds is their broad diversification. And ETFs are cheaper than actively managed funds.
The High-Low Trading Strategy
The trading strategy explained in the book is: buy when prices fall and partially sell when price reach an annual or all-time high. This requires courage as it goes against normal “herd behavior” (buying when stocks go well – prices going up – and selling when stocks perform bad – prices dropping). Buy low, sell high. “Times of maximum fear is the best time to buy stocks, while times of maximum greed are the best time to sell” (Investopedia).
This strategy means:
- diversify broadly: value stocks, growth stocks, different countries, industries and company sizes;
- partially sell when the price of the stock is high (when it’s doubled since you bought);
- invest for the long-term: in the long term most of the indices go up. Better to get in at a bad time than not to get in at all.
- a crash is good, for people with courage: when everyone is selling (downward trend accentuated by stop-loss orders), buying opportunities arise. Buying using the dividends you earned from other stocks, or by partially selling the stocks where you already had at least doubled your investment.
- try to identify new trends at an early stage: stay informed.
The basics of successful investing
Here are a few tips that complement the high-low investment strategy just explained.
- Analyze your errors. Conduct a self-critical analysis. Never try to compensate for individual losses with highly speculative investments, this rarely works.
- Find your very own path to success. Risk-averse investors should focus on stable, high-dividend value stocks. More risk-conscious investors focus on small caps and foreign stocks.
- Seek information from several sources, but avoid information overload. Acquire in-depth knowledge of the stock market, observe the market on a daily basis, find the right strategy for you and implement it consistently across all stock market phases.
- Exercise patience: don’t buy interesting stocks at any price, but use setbacks to get started. At the time of purchase, the stock should be fairly valued, not overpriced.
- Your gut feeling often leads to rash actions. Emotions such as fear or greed lead to panicked sales or overpriced purchases. Anyone who thinks they are smarter than the stock market will pay more in the long term.
- Monitor promising future trends (like demographic change, the Internet of Things and sustainability) and keep an eye on promising stocks so you can buy when the moment is right.
- The trend is your friend. Meaning that the continuation of an existing trend is more likely than a trend reversal on the stock market. Therefore let your profits run and cut your losses. Letting profits run means not selling immediately with every mini-profit, but rather making partial sales when a value has at least doubled.
- Technical signals. To buy low and sell high you need buy signals and stop prices. They also help spot a trend reversal.
- Chart analysis. There are various techniques that show resistance or support in the trend. A well-known example is the 200-day line. It describes the moving average price over the past 200 trading days and is drawn in parallel to the price trend. Breaking the 200-day line upwards is a buy-signal, downwards it is a sell-signal.
- Studies have shown that investors with a short-term orientation, i.e. those who shift frequently, perform worse in terms of costs than those who simply hold their shares stubbornly.
- You should definitely limit losses. Whether you sell at 10 percent minus or at 25 percent minus depends, among other things, on the order size, the volatility of the share and your risk appetite. While Sander is not a fan of stop-loss sell orders, she does find it advisable on some risky small caps. With standard stocks, however, you should do without it.