Most of the news about the stock market focuses on what is happening in the present moment. Why is this company’s stock up (or down) a few percent? What will some news mean for one company or another?
A lot of people make money trading for technical reasons or following other short-term strategies, but many lose money trying to find short-term advantages. Usually, when a stock goes up a few percentage points, it’s because an analyst or someone on television said something about the company.
I could go on TV and talk about how rising beef prices could hinder McDonald’s (MCD) – Get a free report profit in the next quarter. That may be true, and it may lead to fast food chain stocks falling, but it also may not be because stock prices rarely move as expected.
In fact, knowing that rising beef prices will affect a fast food chain’s bottom line offers no real insight. What you really need to learn/understand is how the company handles bumps in the road because they are bound to happen. Yes, you can make some money short term if you can predict how the market will digest beef prices/profit news.
However, you can get rich by identifying any fast food chain (or any other type of business) that will handle the problems well. The media – and pretty much anyone who talks about stocks on television – wants you to keep an eye on the scores every day. The fact is that the only ranking that matters is the long-term ranking.
People make a lot of mistakes when investing, but here are three that I see repeated most often.
1. Think about opportunity as well as success
Sometimes, a company finds a market or a problem for which a real need exists. It’s an important step to becoming a successful company, but opportunity alone doesn’t mean success.
Just because EV sales will boom in the next few years doesn’t mean every startup that makes the components needed for electric vehicles will grow. Yes, it is possible but so are our other plans. For example, automakers can either back up another source or decide to build whatever they need on their own.
Defining a company’s opportunity is one piece of the puzzle, but it’s not the key. Can the company do it? Can it be sold? Will it compete if it establishes the category?
Get Teladoc (TDOC) – Get a free report, an online healthcare provider. Its founders identified a growing market, quickly penetrated and captured market share. The problem is that once demand has been established, it has little difference from similar platforms offered by existing healthcare providers.
Essentially, Teladoc has gone to great lengths to establish telehealth as a category, but it may not turn out to be a winner in the field, or may not even be a major player.
2. Forget that companies are run by people
Do you want Satya Nadella or Mark Zuckerberg to run your company? Both have been successful, but one seems to be more likely, at least for now, to be a steady leader and find lasting success.
At least with that comparison, there’s reason to trust both CEOs. In other cases, companies have unproven leaders or bosses with questionable track record. When you evaluate a company, you need to look at the management. A great founder may not be an effective executive, and a brilliant idea person may prove to be terrible at sales, people management, and other operational tasks.
Good ideas fail more often when they are poorly managed. Good leadership does not guarantee success, but poor leadership greatly reduces the likelihood of success.
3. Try to beat the market quickly
Microsoft (MSFT) – Get a free report After 2022, it will decrease by about 28%. There’s no real reason for that as nothing has changed about the company’s long-term outlook. People still use Windows, Office, and Teams while the cloud is still a growing business and the company is only stronger in the video game space.
However, in the past 5 years, Microsoft has grown by 171%. If you had owned the stock during that time period, you would have lost money this year, but your profits have significantly outstripped the market.
The challenge in investing is not figuring out which companies will rise or fall this week or even this month. It’s about identifying long-term winners and having the faith to keep them going for a really long time.
Microsoft had a bad year, but I’m willing that in the next 5 years, you’ll regret selling your shares if you do in 2022.
