I'd like to cover what I call the 8 Golden Rules for stock investing.
In the last 10, 20, 30, 50 years, stocks have been the best way to build your wealth. they have outperformed all asset classes — bonds, real estate, and commodities — and I built my wealth in the stock market.
But the shocking thing is that there are people out there who actually lose money investing in stocks, and when they lose money they say the market's rigged, or they've got bad luck. They've always got something to blame, they always give excuses or they say that it's because the market's really risky. . .
WRONG! if you lose money in the stock market, it's not the stock market's fault. . .It's you!
The stock market is always right!
Now I always say that the stock market is not risky.
It's only risky if you don't know what you're doing.
It's only risky if you violate these 8 golden rules.
Swimming is risky if you don't know how to swim.
Driving a car is risky if you don't follow the traffic rules and take driving lessons.
If you learn how to drive, and if you learn how to swim, swimming and driving aren't risky. In fact, it gets you to where you want to
go. Same thing with the stock markets.
So I'd like to share with you my 8 golden rules and if you follow these rules, you'll find that investing in the stock market is one of the most consistent, most sustainable ways to build your wealth in a low-risk & stress-free way.
I've been in the markets for over 30 years. I started when I was 17, and now I'm 48 years old.
For the first 10 years, I really didn't know what I was doing. I made all the stupid mistakes that most Investors made.
I broke these 8 golden rules, and did I make money? Well, sometimes, but whatever money I made, I couldn't keep it. It wasn't sustainable.
I'd lose it back to the markets and I'd say "Oh you know, it's because my luck changed."
So I went around in circles — making money and losing it thereafter — until one day, I got frustrated and I said "This can't go on. I have to learn how the market works!"
So it was that moment that I realized that I had to first invest in my own financial education, So I read all the books I could read and I started to model after the best investors in the world like Peter Lynch, Charlie Munger, and Warren Buffett. I read all the books on technical analysis & fundamental analysis, and I began to do some trial and error to see what worked.
That's how I developed my system of investing which I call VALUE MOMENTUM INVESTING™, which allowed me to beat the markets over the long run.
I'm going to summarize the 8 Golden Rules of this investment system that if you follow them, you can achieve consistent profits investing in the stock market in a stress-free, low-risk way. Let's begin!
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A lot of people always ask me and sometimes they post in the comment section asking me why I'm always so optimistic and bullish, why I never seem worried when the market goes down.
That's simply because I know RULE #1.
When we talk about the stock market, we're referring to either the Dow Jones Index or the S&P 500 Index. I usually prefer to use the S&P 500, but in this case, I'm showing you the Dow Jones Industrial Average because it's got a long history of over 120 years, whereas the S&P 500 has a shorter history, but more or less, they both move together.
So if you take a look at the last 120 years, you can see that the market is always going up and people are always concerned.
They ask me "Adam, what if I invest my money now and the market crashes, and there's a recession that could be coming, there's this ongoing war, and there are all these problems there all these uncertainties. You know, I'm gonna wait for there to be no more problems."
Now that ain't gonna happen. Let me ask you this question: In the last 120 years was there always something to worry about?
Yes, there was always a problem out there.
What happened back in 1916? We had World War 1.
In 1929 we had the Great Depression. From 1945-1946 we had World War 2.
In the mid-1960s we had the Cuban Missile Crisis.
In 1974-1975, we also had ultra-high inflation. We had oil prices doubling and tripling, and people calling for a global depression.
In 1987 we had a stock market Black Monday Crash.
We had the Asian Financial Crisis in 1998.
We had the 2000 Dotcom Bubble Crash.
In 2001, we had the 9-11.
We had the 2008 U.S. Financial Crisis where the S&P downgraded the U.S. government debt.
We had the European Debt Crisis.
We had the U.S. government shutting down 3 times, the U.S.-China trade war, and most recently, the Pandemic crash.
So despite 2 World Wars, a Dotcom crash, a Financial Crisis, and a Pandemic, what happened to the stock market?
The stock market always found a way to go up. So the question is, 5,10, or 20 years from now, will the stock market be a lot higher than today?
Of course! It's a fact! It will always go higher! The question is why.
Why do stock prices always go higher?
It's because of earnings!
Remember that when you buy a stock, you're buying a part-ownership in a business in a company, and when you look at the S&P 500 or the Dow Jones, it's a basket of many many companies. Ultimately, the more profits or the more earnings the company makes, the more the business is worth. Profits go up and down in the short term right, for example, look at this chart:
Profits fell during the Great Depression. It fell during the Pandemic. It goes up and down, but in the long run, company profits always go up because, over time, companies keep raising the prices of their goods and services.
It's called inflation.
It's like when I was a teenager. Nike shoes were $20 and back then, it was already considered really expensive. Right now, a Nike shoe costs $200-$400, and Nike is making more money today than 30 years ago — and you'll make even more money 20 years from now.
The other thing is because, over the years, there's more and more people. Population increases, wages rise, so people make more money today than 30 years ago. They can pay more for a Nike shoe, they can pay more for a Big Mac.
So that's why company profits always go up over time, and as companies make more money, the businesses are worth more and more, and their share prices always go up.
People say "Adam, but I need the FED to pump in liquidity for the market to go up."
That's absolute rubbish. Yes, that's true for companies that don't make money. They are propped up by the FED's Quantitative Easing, but those are not the companies that I invest in.
I invest in great companies that make money. I invest in the Index, and for those, we don't need the FED, we don't need all this liquidity. As long as Mcdonald's makes more and more burgers and fries, and Nike sells more and more shoes, the stock price will keep going up.
So on average, company earnings grow at 8% per year. This means that company earnings double every 9 years and that's why stock prices (value of the businesses) double every 9 years as well. On average it goes up about 10%-11% a year.
This doesn't mean that it goes up every single year, of course. In reality some years, the market goes up more than 10%, some years it goes up less than 10%, and some years it even goes down.
So if we take a look at the last 71 years, you can see that there were years the market went down, but not that often. The market went down 18 out of 71 years, so that's 26% of the time.
But 52 years out of 71, the market went up. That's 73% of the time.
So yes, if you invest for only 1 year, if you buy in January then you sell in December, you could lose money.
For example, if you did that in 1953, you would have lost money. If you did that in 2018 you would have lost money. But if you invest for a longer period of time, if you invest for say at least 5 or 10 years, you'll realize that you can never lose money. You can never lose money when you invest over a longer period of time because the gains from the UP years far outweigh the losses from the DOWN years.
It's impossible to lose money in the stock market if you hold it over a longer period of time.
Because of this fact, I've got no fear when my stocks go down temporarily. When my stocks go down I happily buy more because i know it's always going to go up and I'm always gonna make money if I buy companies that actually make money.
We said that the market always goes up right, but RULE #2 is that in the short-term — in the next 1 week, 1 month, 6 months, or even 1 year — no one can predict for certain where stock prices are going.
If you look at the news, you watch videos, you can see that some people will say "This year, the market is going to go all the way down, crash 50% or crash even 80%," and you've got more optimistic people like me who says "No, the 2nd half is going to rebound and make back most of the losses, or even end up with a gain for the second half of the of the year."
Now, who's gonna be right? I don't know. Sometimes I'm right, sometimes I'm wrong, but historically I'm right 73% of the time because you saw the chart — 73% of all years end with a gain. 27% of the time, I'm to be wrong, so you never know when those times are.
No one can agree where prices are going to go in the short term because there are too many moving parts and too many variables.
It is the news and the emotions that drive the market price in the short term, not the value of the underlying business.
Can you predict tomorrow's news?
Can you predict how millions of people will react emotionally to the market in the next 1 day or 1 week?
We can't. So if you think you can predict the market with certainty, it's like thinking that you can predict the weather, or you can predict your wife or husband's mood the next day. It is impossible.
So all we can do is we can just make probabilistic guesses based on reading the price action and based on understanding historical patterns.
So if you've been watching my previous videos you know that based on price action, every time the market drops 90 degrees and when there's extreme fear, the market bounces back.
You know, markets can be totally irrational in the short term, so be prepared for anything. Could the markets drop 80% this year?
Everything is possible.
Could the markets go up 80% this year?
Everything is possible.
Now here's the good news. It doesn't matter whether I'm right or wrong in the short term. It doesn't matter whether markets go up or down in the short term.
It really doesn't matter because if the market goes up in the next 6 months, then it's good. I'd look like a genius and my portfolio would look really beautiful, but if the market keeps dropping in the next 6 months, it's also good news!
As an investor, I'm holding great companies, and lower prices mean that I get more chances to buy my great companies at even bigger discounts. This means that when it goes up eventually — because it always goes up eventually — I'm gonna make even higher returns.
So as an investor you gotta understand that it is a win-win situation.
If the market goes up in the short term, your portfolio looks beautiful. If the market drops in the short term you get a chance to buy more shares at a bigger discount.
But you may say "But if it drops don't I lose money?"
No! If you're holding good companies and you're not forced to sell, you're not losing right.
People get emotional when they see that their portfolio goes into the red and it's always a bloodbath. You're not losing anything if you're holding good companies and you know their intrinsic value, it doesn't matter what the shorter market price is.
It's irrelevant. So the so-called 'loss' that you see in your account is an illusion. It's like the matrix. It is not a loss unless you freaking sell, and you shouldn't sell if it's a good company that's making money, that will go up over time. In fact, there are many companies right now where the sales are going up, the profits are going up, like Nike.
Nike's sales are going up profits are going up, Adobe's going up, and Microsoft's going up!
These companies are worth more and more every single day but their share prices are going down! Should you get upset? Of course not, because it doesn't matter it's a freaking illusion right!
So take advantage of the illusion by buying more shares, and if you have no cash to buy more shares, then just ignore the market!
This red that you see is just an illusion, because once the market sentiment changes — and it changes really fast — and the prices zoom up again, then it's gonna all turn green eventually.
Remember it's not a loss unless you are forced to sell, and if you're holding good companies and you're investing with money that you don't need in the short term, there's no reason to sell.
I find that a lot of retail investors break Rule #3, and that's why they lose money.
Never make investment decisions (buy and sell) based on the predictions of experts, whether they are economists, analysts, or
YouTubers, and never make investment decisions based on reading news headlines.
Sometimes when I read the comments on my YouTube channel, people say "Adam, you predicted the market is going to go up and I bought, and I lost money! You predict the market is going to go down and I saw it and lost money!"
Well, first of all, I never make any predictions. If you watch all my videos, I always say that 'there's a probability' the market is going to bounce from here, 'there's a probability' that the market is going to reverse.
I always use the word 'PROBABILITY' because what did I say? No one can predict for certain!
So that's the first thing to understand. Number two is there are other people out there who make predictions. Yes I know there are people on the news and on YouTube that will say "Oh the market is going to go up! The market's going to go down!" and if you make buy or sell decisions based on their predictions, you are freaking idiot!
Never buy and sell based on anyone's predictions because no one can predict where the market is going! They are all guessing. It's all based on probability.
So you may say "Okay so if I don't buy and sell based on the predictions, based on the news, then what determines if I buy or sell?"
So that's gonna be covered in Rule #5 and Rule #6, so stay tuned! But I'll give you a bit of a preview.
Your decision to buy and sell a stock is entirely based on your investment plan. It's based on the fundamentals of the individual business. It's based on whether the business is undervalued or overvalued. It's got nothing to do with predictions of where the market is going to go.
I read the news as well. I listen to the predictions of all these people as well, but when I listen to all these people or read all the news it's, purely for entertainment purposes. I never make any decisions to buy or sell based on any of this macro news or events.
So here are a few examples of why you should never listen to predictions. Even Goldman Sachs, the premier investment bank on Wall Street, too can't predict the market for certain.
So back on June 21st, 2012, Goldman Sachs said to short stocks. They were recommending their clients build short positions in the S&P 500 due to a weakening domestic economy, and what happened?
When they said to their clients "Short the stocks!", yep you bet! The market went right up 7%!
Now I don't blame them because like I said, no one can predict it right. So you should always invest based on the individual business' fundamentals.
So if Mcdonald's is making more and more money, then it's a great business! You'd buy Mcdonald's if it's undervalued regardless of market predictions. Sure the stock could still go down in the short term, but who cares!
As long as they are selling more and more burgers and fries, their stock will go up eventually, and by buying more at a lower price, you'd get even higher returns in the future.
This was one that happened earlier this year. On the 14th of March, JP Morgan had this statement that said Chinese internet stocks are uninvestable. They told people to sell their Chinese internet stocks, and 2 days later the stocks went up with double-digit returns.
Yes, they did go down a bit more after that, but now China has bottomed, and China's now coming back and starting a new bull market.
I'm not surprised that this year China will outperform the U.S. market because it's a cycle. China has underperformed the U.S. in the last few years. China went into a bear market first, so it stands to reason that now that the U.S. is going into a bear market or in the bear market while China is going out of the bear market — it's always a cycle.
Another thing is to never sell based on reading headline news.
The S&P 500 over this 10-year period went up 495%, but the reality is most investors would not have seen their investments grow at 495% because there's always something in the news that's gonna freak them out to sell.
Look at all this news. There's a saying that a bull climbs a wall of worry. It's when everyone is worried that the bull market keeps continuing.
If you keep reading this kind of crap in the news, you will never have the conviction to hold on to good businesses and allow them to grow your wealth in the long run.
So I suggest to most of my students DON'T READ THE NEWS! If you want to read the news, read it purely for entertainment purposes, but never ever buy and sell based on any news headlines, predictions, or opinions of anyone out there.
Now if you think about it what is the stock market?
It's a supermarket of companies where companies are on sale every day, at different prices.
If you go to your local supermarket and everything's on sale at 30%, 40% discounts, you're gonna be excited. You're gonna buy right, but the stock market is the only supermarket in the world where people run for the exits when things are on sale because most people don't understand the business behind the stock that they bought.
They don't understand what the business is worth. They don't understand the intrinsic value of the business and of course if you buy a lousy business that's losing money, yeah I understand. You should sell, you should be fearful right.
But again as an investor, if you buy good companies that are making more and more money every year and they're growing in value, any short-term decline in price should be a reason to get excited to buy more of those kinds of businesses. But you have to understand the business.
When you understand the business behind a stock, there's no more fear. You'll think logically, and not irrationally like most people.
The markets always go up in the long run, we know that, but it doesn't go up in a straight line. It goes down once in a while. It's the nature of the market, and when you know that the market will go down once in a while, you expect it, you don't fear it, you take advantage of it, or you ride with it. You accept it as part of the game.
So how often does a market decline?
The market declines 5% or more, roughly about 3 times a year. The market declines 10% or more about once a year. The market declines 15% or more once every 3 years, and the market declines 20% or more — it's called a bear market — once every 6 years on average. They are gonna happen, no one knows when, but they're going to happen.
Everyone says they can predict when it's going to happen, but they predict it every year until it happens. A broken clock is right twice a day, but the reality is that no one knows exactly when it's going to happen.
But here's the good news.
Even the big declines called bear markets don't last forever!
Every bear market will end. Winter won't last forever. Winter will end, and following winter is always Spring and Summer.
Following a bear market is always a bull market, and bull markets are always longer and gain more than the temporary falls in the bear markets.
It's like after a 29.6% decline over 3 months, the market then went up 816% for the next 12.8 years. After a 44% decline over 2.1 years, the market went up 108% over the next 5 years. After a 50% decline of 1.3 years, the market went up 350% for the next 9 years.
So again, bull markets last longer than bear markets, and they always gain many more times than the temporary drop of the bear markets.
People are afraid of bear markets because they're thinking "What if I buy and it goes lower," and they always think that they've
gotta buy the bottom to make money.
You don't have to buy at the bottom to make money.
Now think about it. The average bear market drops 35%, and right now the market's dropped 25% on the S&P. Now it's bounced back a bit, but it went all the way down to close to 25%.
Let's say you bought after a 25% decline, and after you bought it went down another 10%. Does it really matter? It doesn't really matter if it went down another 10%, 15%, or 20% because ultimately it's gonna go up 200%-500%, so it doesn't matter whether you bought at -20% or -35% if it's going up many hundred percent-fold in the future.
Investors have to get over that. Let's imagine you bought a stock at $50 today, and it's gonna be $200 in the next couple of years. Will you be happy? But what if I told you that after you bought it at $50, it dropped to $30 first before going to $200. Will you still be happy?
It's the same thing right, so why do you care that you dropped even more before eventually going up to way above where you bought it right. Like I said, as an investor you never want to invest all at once.
You always want to save a bit every month to put a bit into the markets consistently, so if it drops to $30, you can still add in a bit more to keep averaging your cost down. So eventually when it bounces $200, you'll get an even bigger return!
So we've covered the first 4 rules. In the next blog, we'll cover the next four rules! STAY TUNED
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is a professional investor & trader and award-winning financial educator. A self-made millionaire by age 26, he is the founder of the Piranha Profits™ online trading school. As a trusted mentor, Adam has clocked more than 38 million views on his video tutorials. Since 2002, he has touched the lives of over 1.2 million people in more than 124 countries. He is the author of 16 best-selling books that have sold over 500,000 copies worldwide, including Winning the Game of Stocks! and Secrets of Self-Made Millionaires.
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