Don’t Be The Dumb Money In The Stock Market

By | August 10, 2020

Smart money or dumb money. Truth is we are all somewhere in between. Including those that trade for a mutual fund or ETF. Or even professional stock analysts.

To be dumb in stock market investing means that you trade based on information that has little relevance. For instance, what other traders say on bulletin boards. It could also be trading based on how the market is moving today. Even going by what the analysts say.

While this information is important, it does not trump true data. Yes, check out a company because you find you are spending a lot of money with them. No, don’t buy just because of this. Most important, check that the company has:

  • Plenty of cash
  • Zero or little debt
  • Good profit growth or revenue growth that will lead to profitability
  • If the company is profitable, a good return on equity is important

Lastly, you need to know that you are paying a good price. Calculate the profit you think the company will earn over the next 10 years then calculate the discounted net present value, divided by number of shares outstanding, to get a price target.

If you go by the real numbers and like a company, you could check other things like the company’s most recent news, how analysts or bloggers feel about a company, or what your brother-in-law thinks about them.

If you want to buy based on what you find out, make sure you slowly buy shares of stock to get the best prices. Then ignore what the market does.

So just to reiterate… smart money looks at the hard data and makes a good decision, even if some information is a little fuzzy. Dumb money bases their trading decisions on things that matter very little, often losing money in the process.

By the way, it might seem that the smarter thing would be to trade on information that is not public. That would give you a jump on market traders. Even if you could figure out how to do this it would be illegal. And you really don’t need to. The public information is all you really need.

Going back to one more thing I’ve said all along: Trade in only the number of companies you can keep up with. I recommend ten. Check all your companies’ numbers monthly or after a quarterly report. Once you’ve been through this once it should not take too much time.

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