If we treat stocks like how we treat our properties, maybe the average person would get better investment returns.
Instead, most people buy stocks on rumours and speculation instead of real analysis.
Here are a few things you should do before you buy a property or invest in a stock.
1. Do Your Analysis
Before you bought a new home, you would survey the floorplan, you would check out the neighbourhood, you would check if it is near parks, schools, food courts, bus stops, train stations, etc..
Do you ever just buy a house simply because you overheard a conversation from the kopitiam table next to you that the property is going to go up in value in the next 6 months?
You wouldn't!
You would do some research on that said property.
You would compare the prices of the property you are thinking of buying against the prices of properties in the same neighbourhood.
Do that with stocks that you are buying.
Are people using/buying the company's products/services?
What are the valuations of the company you are thinking of investing against its peers?
Is it cheaper or more expensive than its peers?
What growth potential does the company have that can make the stock price go higher or pay more dividends?
Do the research, determine if the stock is worth buying or not.
Don't invest blindly!
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2. Understand What You Are Investing For
Are you investing for capital appreciation or dividends?
When you invest in a property, you can be investing to earn the capital appreciation (rising property price) or you can be investing to earn rental income.
If you ask a property investor, they will tell you that properties that are meant for renting will have characteristics that are different from properties that are meant for quick capital appreciation (property flipping).
Same applies for stocks.
Are you going to be a capital appreciation or a dividend kind of investor?
If you are going to be a dividend kind of investor, what you want is a stable business, with strong cash flows, and a consistently growing dividend.
If you are going to be a capital appreciation kind of investor, then you would look for businesses that have huge growth potential, reinvests a lot of its capital back into the business, etc.
What you don't want to do, is to be a dividend kind of investor, but invests in stocks that don't pay a dividend.
So, understand what kind of investor you want to be, and choose stocks based on what kind of investor that is.
Of course, you can be an investor that mixes both dividend and capital appreciation, in which case you would have very different criteria.
3. Invest For The Long-Term
Do you check your property price every day?
If not, why do you check stock prices every day?
If you check your property price every day and realised that your property price has fallen by 10%, do you feel so sad that you want to sell your property immediately?
If not, why do you do that for stocks?
If the property is still earning you rent, you probably won't sell even if the price fell by 10%.
Most likely, you will wait for the price to rise back up.
The same can be applied to stocks.
If it is still paying dividends (and that was what you were after), there is no need to sell the stock immediately even if its stock price fell by 10%.
4. Don't Over-Leverage
When buying a home, you try not to over-borrow and get yourself too deep into debts.
You try to calculate how much you can afford and how much you can rise, and borrow appropriately.
Source: Gannett
Same applies to stock investing.
Just because you can leverage and invest on borrowed money (margins), doesn't mean you should.
Don't take on unnecessary risks that you cannot afford.
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Conclusion
Know yourself, know your goals, know what you are looking for in an investment, and don't over-borrow!
What other similarities are there between buying properties and buying stocks?
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