For those of you who don’t know, the term “retail investing” refers to any regular person plowing their own money into financial markets. The vast majority of us are retail investors. We select financial instruments and then buy them in the hope that their value will rise.
Retail investing, however, is a massive challenge. As an individual, you know relatively little compared to the major financial players in the market. You are, therefore, at a significant disadvantage.
Most retail investors wind up losing money, but you do not have to. In this post, we are going to look at some of the golden rules of investing and how you can wind up winning long-term.
Look For Companies with Strong Intangible Assets
In business accounting, there are two types of assets: intangibles and tangibles.
Tangible assets are physical things like buildings, computers and equipment. Intangibles are the stuff that exists in the realm of ideas, such as brand value.
Warren Buffett is a keen proponent of the idea that we should all buy brands with strong intangible value. A fire could burn down a building, but the intangible things like the brand will remain.
Choosing Winning Countries
Not all markets are the same. For years, stock indexes in Europe have stagnated while those in the US and China have flourished.
Investors need to remember that the world is not a homogenous place. There are massive differences between countries – and these play out over the long-term in their stock markets. The US has a booming economy and a high fertility rate. It also attracts the most talented people from all over the world. Naturally, it has a better performing stock index than a place like Italy or France, both of which are stagnating economically.
If you are not sure how to convert into foreign equities, just speak with your forex broker. They convert domestic currency into foreign tender and then use that to buy the stocks you want.
Choose Companies That Could Benefit From Network Effects
“Network effects” are the new holy grail of investing. When companies achieve this status, it means that the bigger they grow, the more difficult they are to challenge. Nobody is going to oust Facebook, for instance, because it offers the biggest network in the world. Moreover, by doing so, there is little incentive for anyone inside the network to look elsewhere for alternatives.
Intrinsic Cost Advantage
Intrinsic cost advantage is actually similar to network effects conceptually. Here again, companies benefit from their large size. Companies with the biggest pocketbooks can buy their inputs in bulk at the lowest prices and then pass on these savings to their customers. This inherent advantage means that it is impossible for anyone else to set up and compete with them, allowing them to generate big profits long-term. That, in turn, will push up the stock price enormously.
Retail investors, therefore, can make money on financial markets, but they need to be well informed. It is not enough to buy a stock because your friend did. You need to be smart about where you put your money.
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