Investing — which requires much more than an understanding of textbook economic theory — can garner big rewards, if done right. Here, savvy Elis offer their personal tips on how to cash in and cash out.
Do your own company research and analysis
By Brandon Wilton
1. Take a look at your investment time window. If you have a lot of years to work with, then high risk/high return investments might be more attractive. If you are going to need cash in five years, low-risk investments are most advisable.
2. Before purchasing a particular company’s stock, analyze the industry in which the company operates. How has the sector’s recent performance been? What is the outlook for the entire industry as a whole? In the same sense, examine your particular company’s financial data in relation to those of similar companies. A higher-than-expected P/E ratio (in comparison to similar companies) might indicate that a particular stock is overvalued.
3. Investigate a company’s current standing, both in terms of new products/services that might be offered as well as in terms of organization structure. For example, you might be a big believer in the future prospects of iTunes and the iPhone, but if Steve Jobs’s health might further deteriorate, Apple Inc.’s stock value would plummet.
4. Examine other companies in order to diversify your holdings, so as to minimize your chances of losing money in your overall portfolio. For example, purchasing shares in both an oil company and an airline might be a good way to minimize risk related to oil price volatility, since, if the price of oil rises, the airline’s stock price decline will (hopefully) be offset by an increase in the oil company’s price.
5. Once you assemble a portfolio, keep abreast of current financial events! What was once a great investment might become a terrible one in a short time. This is where it might make sense to simply leave your specific stock purchases up to a mutual fund, even though some might claim that mutual funds can be a rip-off.
Brandon Wilton is a junior in Calhoun College. He is the finance director of the Yale Entrepreneurial Society and the editor-in-chief of the Yale Economic Review.
‘Know thyself’: Investors have personalities
By Faten Al-Alawi
1. Know your investor profile: Everybody has a different personality. Similarly, everybody has a unique investor personality. Before building your portfolio of stocks, you must decide whether you are a risky or a conservative investor, or an aggressive or a defensive one. Your investor profile determines the stocks you will choose to invest in, and the way you will buy and sell stocks.
2. Selecting stocks: There are two main approaches, the top-down approach and the bottom-up approach. The top-down approach entails analyzing the market and looking for strong sectors. Once you have found a strong sector, you then find a strong company and invest in its stocks. The bottom-up approach consists of looking for strong companies in the market and analyzing individual stocks. A different approach that I find very interesting is called “chart analysis.” With chart analysis, you look at the movement on the share price and make your move when the time is right. Your instincts and chart analysis skills help you determine the right time.
3. Your portfolio: Make sure your portfolio contains a manageable number of stocks. If you are planning to track the progress of your stocks on a regular basis, then having 60 stocks in your portfolio will give you a huge headache. Plus, having a small number of stocks in your portfolio allows you to easily determine which group of stocks is bogging you down, and which group of stocks is increasing your portfolio’s value. This means you can make decisions quickly, because in the stock trading world, time is literally money.
4. Be patient: Do not sell a stock as soon as it peaks. Stocks often double peak — they peak, drop down sharply, and then peak even higher before dropping once more. An aggressive investor holds stocks for a very short period of time. Often, this means they miss out on opportunities to sell the stock at a better price.
5. Avoid penny stocks: They are so volatile that you have to be crazy to even consider buying them. The problem with penny stocks is that it takes a while to get them off your hands once you have bought them because the market volume for these stocks is so small. It’s all or nothing with penny stocks, so I wouldn’t dare go near them. If you’re considering penny stocks, don’t buy a large number of shares.
Faten Al-Alawi is a freshman in Davenport College. She is a member of the Women in Business and Leadership Initiative at Yale.
In the stock market, never put money on ‘hope’
By Marcus Shak
1. Always have a thesis: Before you buy a stock, you should carefully think about why you want to buy it and reason out what you think will happen that will cause the stock’s price to increase.
2. Invest with an exit strategy: Whenever you make an investment, you need to be prepared to recognize what will prove your thesis right and what will prove it wrong. After that, all you have to do is wait until either event occurs. In this way, you can avoid being placed in difficult positions.
3. Let your gains compound, but don’t let them turn into losses: If one of your investments is doing well, you shouldn’t immediately sell it, but you also shouldn’t become complacent. A good strategy is to sell some of your shares so that eventually your original investment is safely in cash and you only stand to lose your profits.
4. Don’t follow the herd: When everyone seems to like a company, they have already bought shares, and it is usually time to sell, not buy. The expectations for the company are probably too high. The best investments are unpopular ones.
5. Admit when you are wrong: Never be afraid to sell at a loss. Don’t sell just because the stock is going in the wrong direction, but do sell if something happens that you didn’t expect or if your thesis is proven to be wrong. Your money can be put to better use elsewhere.
6. Hope is not an investment strategy: Never find yourself holding a stock because you hope it will go up, or because “it can’t possibly go any lower.” Shares of stock are just pieces of paper, and they can be worth nothing. The past year is proof.
7. Pay attention to market sentiment when buying and selling: The market moves in trends. Wait until people are afraid before you buy, and wait until they are jubilant before you sell. You should never rush to buy or sell. Sometimes a stock might go up without you, but usually it pays to carefully time your trades.
Marcus Shak is a freshman in Pierson College and a business columnist for the News.