Now that you have an idea of why you need to invest and some fundamental principles in investment as well as asset classes, you can invest in it. For you to start winning in a big way, you would have to put in the time. You would have to put in the effort. You would have to have the proper experience and groundwork to make that happen. And in many cases, even with the best-laid plans and with the best strategies laid out, things still don’t pan out.
The better approach is to do the best with the situation you are facing. In other words, use specific strategies that would enable you to position yourself to come out ahead. They might not necessarily result in you making tons of money or experiencing truly stupendous returns, but they can position you for solid gains. The following strategies enable you to do just that.
Buy Depressed Assets
Now, this might seem straightforward. After all, this is just a reiteration of the classic investment and commercial maxim of “buy low, sell high.” However, the big challenge here is in determining what constitutes a “depressed asset.”
You might be thinking that a stock that was trading at $50 and pops to $150 might not be all that depressed if it fell to $100. You might be thinking, where’s the depression? This is not a fire sale. It hasn’t fallen enough.
If you look at the stock’s trajectory and how much growth potential and market attention, it might very well turn out that the stock is headed to $300. Do you see how this works?
If that’s the case, then scooping up the stock at the price of $100 after it fell from $150 is a steal. After all, buying something worth $300 for a third of its price is one heck of a bargain.
Now, the big issue here is how do you know the stock’s full future value? This is where serious analysis comes in. You can’t just buy stocks on hype. It would be best if you looked at facts that would inform the growth trajectory of that stock.
For example, is it a market leader? Does it have certain drugs in the approval pipeline that have little to no competition? Is it on the cusp of a breakthrough drug patent? Is it in the process of buying out its competition?
There are many factors that you should consider, which can impact the overall future value of a stock. You should pay attention to its current developments, and you should pay attention to the news cycle surrounding the company.
You should also pay attention to its industry. Is its industry fast-expanding, or is it a “sunset industry” on its last legs? If it’s in a sunset industry, there might still be opportunities there because, usually, such industries witness a tremendous amount of consolidation. Whatever the case may be, always be on the lookout for the future value of a stock based on what you know now, as well as its past performance.
What happens if you buy a stock that subsequently crashes? This happens to the very best of us. If this happened to you, don’t get depressed. Don’t think that you suck at investing. Don’t think that all is lost. If you get caught in a downturn, it might be an amazing opportunity.
Now, it’s important to note that almost all stocks experience a pullback. I have yet to come across a stock that has appreciated positively with no dips in its trading history. I’m not aware of a stock that hasn’t experienced a day-to-day dip in pricing. All stocks experience a pullback. Even stocks that are well on their way to becoming breakthrough or high-valued stocks will experience dips.
What happens if you bought a stock that drops in value tremendously? Well, you have two options at this point. You can wait for the stock to keep going up and then start buying some more. You’re taking bets on its recovery.
The better approach would be to use this as an opportunity. For example, if you bought, for the sake of simplicity, one share of stock at $100 a share, and the price crashes 50% to $50 a share, you can buy one share at $50, and this would average out your holdings to $75 per share.
Ideally, you should wait for the stock to drop so much and then buy a whole lot. This enables you to set your break-even point at a much lower level. For example, using the same hypothetical facts mentioned above, instead of buying one share, you buy 9 shares at $50. So, what happens is, the average price per share gets reduced to $55.
Even if the depressed stock manages to limp along and possibly pop up here and there, it doesn’t have to pop up all that much to get all your money back from your position because once it hits $55, you’re at break-even territory. Compare this with breaking even at $75 or, worse yet, waiting for the stock to come back to $100 a share. It’s anybody’s guess whether it will back to that level.
This strategy is called dollar-cost averaging, and it is very useful. You must have free cash available, and you must use that free cash at the right time.
That’s how you maximize its value. That’s how you fully take advantage of opportunities that present themselves. Otherwise, you might be in a situation where the stock crashes so hard that you could have broken even very easily with little money spent, but unfortunately, you were locked out because you don’t have the cash to do it.
Buy Self Liquidating Assets
Another investing strategy you can take is to buy assets that pay for themselves. For example, if you spent a million dollars buying a building, but the building generates rents totaling $100,000 per year, the building pays for itself in roughly 13 years or more, factoring in taxes and other costs.
Self-liquidating assets may seem too good to be true, but they are very real. Most of this applies to certain types of real estate, like commercial properties. However, this strategy also applies to stocks and bonds.
For example, if you buy stocks that have no dividend and you buy bonds, you can use the bond interest to start paying off your stock’s portfolio. Of course, this can take quite a bit of time if you factor in interest rates as well as taxes.
Smart Money Valuation
Another winning strategy is to buy into private corporations as a sophisticated investor at a much lower valuation. Now keep in mind that many mobile app companies are popping up all over the United States. You don’t necessarily have to live in Silicon Valley of California to have access to these types of companies.
The great thing about these companies is that in the beginning, they require very little capital. Many require “Angel,” “per-Angel,” or even raw seed capital. The founder would have a rough idea of software, an app, or a website. This is the most basic stage of a company’s evolution.
Now, when you come in as a source of seed capital, you can lock into a large chunk of the company’s stock for a very low valuation. For example, somebody comes up with a startup idea, and the initial cost is a maximum of $1 million. If you were to invest $250,000, you have a 25% stake in the company.
You may be thinking that 25% of a company that’s not worth that much, which is very, very risky, doesn’t seem like a winning proposition. Well, keep in mind that after the seed stage, the company’s valuation usually goes up. So, once your money has been used to push the company further along its developmental path, the company’s valuation starts to go up, especially if they now have something more concrete to show other investors.
You may be asking yourself, okay, the smart money valuation thing sounds awesome. This is great in theory, but is it real? How can the Average Joe investor get in on such deals?
There are websites like Angel List and others, as well as LinkedIn groups that publicize startup projects that are actively recruiting investors. Of course, you need to do your homework and pay attention to the track record of the founders.
Learn The Right Investment Mindset By Reading Books
Mindset plays a large role in successful investing. My reading list contains many books on mindset.
A few weeks ago, I read the Rich Dad Poor Dad book and found it quite fascinating.
In Rich Dad Poor Dad, the author explores the steps to becoming financially independent and wealthy using autobiography and personal experience.
Narrative writing and framework characterize this book. Not technical insights or investment math, but anecdotes with nuggets of supposed wisdom, is the focus of this book.
The author compares his biological father’s (an intelligent, but financially inept father) lessons with the lessons his friend’s father teaches him (an uneducated, but brilliant and wealthy father).
In Kiyosaki’s life, this weaves through as he learns from the rich father and rejects the advice of the poor father (thereby eclipsing typical working-class attitudes).
However, some of the concepts in this book are questionable. Learn more about my thoughts about Rich Dad Poor Dad in my Rich Dad Poor Dad review.