When you consider investing, or if you’re already involved in investing, some tips can be helpful. Since the market can see various highs and lows in a single day, you may want some direction. Last year, you may have noticed the market reached several all-time highs. You may be wondering what 2020 will bring. As the New Year starts, here are a few tips to consider.
Pay Attention To Valuations
Valuations matter to fundamental investors. By looking at economic and financial factors, they analyze and measure the intrinsic value of a security, i.e. stocks, bonds or other tradable derivatives. This helps them come up with a number to compare with the security’s current price. Then the investor can decide if the security is under or overvalued.
See more about fundamental analysis at Investopedia.
A stock may have a high price-to-earnings ratio (P/E), and some investors may think that means the stock price will drop or make a correction. This is the case with Microsoft (MSFT) right now. However, they continue to report strong software sales and a growing cloud business. Their subscription growth is unlikely to fall, so their high P/E of 31 times is justified.
Contrast that with GameStop (GME), which has a forward P/E and a cheap price. But this doesn’t mean that it’s a value holding stock. Downloads are hurting game sales at GameStop.
The tip: Stick to a range that you find acceptable. Then have the discipline to buy and sell at the appropriate times.
Avoid Stocks At The Peaks
You might be okay if the market really peaked at the end of 2019 AND you avoided stocks that reached all-time highs in the last year. Otherwise, if profit taking increases now, you might be about to experience some losses for a few years.
It turns out that investors are at the mercy of the uptrending markets. Stocks that may have run up to all-time highs offer no margin of safety. This becomes even truer if the stock is held mainly in mutual funds and index exchange-traded funds. A little tip: sometimes your best bet is to wait for the earnings reports before jumping in the markets at the peaks.
Avoid Stocks You Cannot Explain
The tip comes first for this one. “Peter Lynch once said that if you can’t explain why you’re investing in a company on a postcard, then don’t invest in it.” This is a great tip!
(See the article quoting Peter Lynch here.)
If you don’t know the difference between drug discovery and drug sales, then you shouldn’t be investing in the biotechnology sector. If you have a basic science background and like to follow clinical studies or you can see a path for early-stage drug developers in the biotechnology space, then you should find and hold some drug stocks. This can diversify your portfolio!
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