Stock Market Investing Advice

by Bullhunter on August 2, 2010

Probably the best stock market investing advice that I have ever heard, was that of stock intrinsic value, and how news works, but who can you take advice from when it comes to the markets?

Stock Market Investing AdviceAs far as long term stock market investing is concerned there seems to be a lot of confusion,  and people make unbelievably dumb investing mistakes when investing their money; they invest all of their money in the company they work for, they buy just because of the herd mentality and then they accept a loss as being okay (because of the herd mentality).

Stock market investing advice is easy to find, and it can prevent you from making some silly stock market investing mistakes! First you have to realize that every stock has its own intrinsic value, and long term performance will be affected by this intrinsic value.

People also forget the cost of inflation when calculating long term returns and they talk as if $100,000 20 years later will have the same buying power as $100,000 today, that is another big mistake! This is a great piece of stock market investing advice to bear in mind, inflation is your second enemy (After tax), and you have to assess it correctly, basically in most stable economy countries inflation is said to be between 0 and 3% but is actually higher than that. Ideally you want to expect at least a 5% annual inflation rate, and if you want to work out the buying power of your money after X years, then you have to use the following formula:

Long term stock market investing advice should take into account the future value of your returns:


We assume 5% inflation rate above, if it was 7%, then we have to use 1.07 on the above equation. For a 5% annual inflation rate, and a 20 year long investment we find that inflation discounting will be 0.376!  That means that the buying power of $100,000 of today’s money will be just $37,600 after 20 years – in today’s money! That means inflation will have caused a 62.4% damage, and it is something you want to check against the stocks you plan to invest in.

Suppose you invest your supposed $100,000 in some great stocks that will increase in price 5 fold over those 20 years, so at that time you will have $500,000 how much buying power will that half a million dollars have then? It will be equivalent to $188,000 of today’s money, so in reality you will have only made an 88% return or $88,000!

There’s no more valuable stock market investing advice than that of intrinsic value and inflation discounting:

You have to find stocks that have high intrinsic value, maybe at least twice their trading price, and then figure out the potential return if their price reaches that intrinsic value!

•  A stock that trades at $5 and has an intrinsic value of $20 has the potential to hit the $20 level in the stock market, that would be a 300% gain and covers you inflation wise, over 20 years.

•  A stock that is at $5 and has an intrinsic value of 10, will offer a maximum sustained upside potential of 100%, take away the 62.4% inflation damage and there’s isn’t much left, what if the stock only makes a 50% gain while inflation has eaten away 62.4%? You will actually have lost money even though you will not have noticed!

Inflation is very tricky and matters to retirement planning and investing, inflation is a kind of stealth tax by which the government taxes us, and it’s also a stealth way to repay national debt in debt burdened countries, nobody is asked to contribute money towards the national debt, but all of a sudden all the goods and consumables start to rally in price out of control – that is how the national debt is paid off!

Do you think the IMF really pardoned Haiti and really wrote off that 300 million dollar debt? Or similar loans lent to other countries? They will end up paying every penny of it through their sky high inflation rates, there’s no such thing as a free lunch!

Now imagine having invested in those countries, in local currencies your stock investments will have made multi fold gains, and yet you will end up losing money.

Stock Market Investing Advice has been guest posted by..
Scott Smith @ investingthestockmarket.com

The Bullhunters Guide
Universal Wealth Creation © 2004 – 2010



{ 2 comments… read them below or add one }

Tom Gores August 17, 2010 at 6:26 pm

Before investing, it is best to know the rules of every country when it comes to investment. You’ll never go wrong if you have those.

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Kristine September 18, 2010 at 8:42 pm

Excellent advice. Investing is not a joke so we better be knowledgeable of everything especially of the market and we should only start if we answer the question… Can I do it? There is always a “good” reason not to invest, but in reality there is a even better reason to start investing immediately. In fact, starting sooner rather than later is one of the best investment decisions you can make.

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