How to make money investing

The best way to gain your financial independence is by saving and investing, using time in your favor.

You should not buy stock or any other asset thinking that you are going to wake up in the morning rich. You might just go to a casino, because you are not investing, you are playing.

Quoting Albert Einstein:

“Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”

In my opinion, the best way to achieve the “eighth wonder of the world” is using a long term buy and hold strategy, making an efficient portfolio by maximizing return at the minimum risk.

Your asset allocation will depend on the investor profile, risk tolerance and the investment purpose.

To learn more about the efficient portfolio, I recommend you Modern Portfolio Theory and Investment Analysis, also available in kindle version Modern Portfolio Theory and Investment Analysis, 9th Edition.

I mentioned a passive management stategy (Buy and hold), that means having a well-diversified portfolio (like buying an ETF that replicates the market – like the SP500 index).

Investing this way, you save a lot in research and brokers commissions and you can adjust it to your risk profile by adding bonds.

Studies indicate that a deep research can add you something like 1% on your return, but that is only relevant if you are investing a lot. For example, if you are investing 100.000 € you will be adding 1000€ in your return. If you are investing 500.000.000 your return would increase by 5000.000€.

A performance evaluation on investment funds and pension funds shows that most of these professionals cannot beat the market.

The efficient-market hypothesis is a useful reminder that the average investor cannot expect to beat the market after expenses.

As a result, low-cost vehicles like index-trackers and exchange-traded funds have become more popular. But the mere fact that the market is hard to beat does not make it rational. Analyzing an irrational market is extremely difficult, (…)

The economist, January 8th 2011

The below image shows the return of 100 USD investment on an index

Corporate Finance (3rd Edition) (Pearson Series in Finance)

If you are up to choosing your stocks and making your own research, instead of using ETF that replicates an index, you will have to decide whether to use fundamental or technical analysis.

But if you believe in efficient-market hypothesis, you should presume that all the public information is already reflected in price.
Fundamental analysis focuses on the study of economic and financial variables underlying the value of the company while Technical analysis focuses on the analysis of price patterns.

Because both of them depend from public information, we should presume that both of them do not generate an extraordinary return (alfa).

However, stocks with better performance in the last 6 to 12 month usually have alfa > 0 [momentum effect]

Research Review: Momentum – Jegadeesh & Titman, 1993

posted on October 15th, 2015 by Bellmont Research Team

 

If you would like to learn more about technical analysis, I recommend Technical Analysis Explained, Fifth Edition: The Successful Investor’s Guide to Spotting Investment Trends and Turning Points (Business Books), also available in kindle version Technical Analysis Explained, Fifth Edition: The Successful Investor’s Guide to Spotting Investment Trends and Turning Points.

 

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Keep calm and invest

António Ramos

Financial Analyst

(CEFA holder)

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