How to make money in the Stock market

NAIROBI, KENYA: It has been a difficult year for businesses, so making money is going to be a top priority for many of us going into the new year.

With that in mind, here’s a list of investment tenets and principles that Walter Schloss put together in 1994. Schloss is one of the investors that I model much of my investment philosophy and strategy on. He averaged returns of more than 20 per cent per year from 1955 to 2002 while running his private investment partnership, against a market average of seven per cent.

Schloss was a high school graduate who never went to college, but learnt from the best (Benjamin Graham, who’s known as the father of value investing). All he did was implement Graham’s basic concepts over five decades to produce one of the greatest investment track records ever.

He crafted the following 16 factors needed to make money in the stock market. Notice the simplicity of his philosophy – there are no black boxes, algorithms or Greek letters; just common sense.

1.  Have patience. Stocks don’t increase in price immediately.

2.  Have the courage of your convictions once you have made a decision.

3.  Price is the most important factor to use in relation to value. It is not what you buy – it is what you pay.

4.  Don’t buy on tips or for a quick move. Let the professionals do that if they can. Don’t sell on bad news.

5.  Try to establish the value of the company. Remember that a share of stock represents a part of a business and is not just a piece of paper.

6.  Don’t be afraid to be a loner, but be sure that you are correct in your judgement. You can’t be 100 per cent certain, but try to look for weaknesses in your thinking. Buy on a scale down and sell on a scale up.

7.  Use book value as a starting point to try and establish the value of an enterprise. Be sure that debt does not equal 100 per cent of equity.

8.  Have a philosophy of investment and try to follow it.

9.  Don’t be in too much of a hurry to sell. If the stock reaches a price that you think is a fair one, then you can sell. Often, because a stock goes up 50 per cent, people say sell it and button up their profit. But before selling, try to re-evaluate the company again and see where the stock is in relation to its book value. Be aware of the level of the stock market. Are yields low and profit to earnings ratios high? Is the stock market historically high? Are people very optimistic?

10. When buying a stock, try to buy near the low of the past few years. A stock may go as high as Sh125 and then decline to Sh60 and you think it attractive. But three years before, the stock sold at Sh20, which shows that there is some vulnerability in it.

11. Try to buy assets at a discount rather than buy earnings. Earnings can change dramatically in a short time. Usually, assets change slowly. One has to know much more about a company if buying earnings.

12. Listen to suggestions from people you respect. This doesn’t mean you have to accept them. Remember, it is your money and generally it is harder to keep money than to make it – and once you lose a lot of money, it is hard to make it back.

13. Try not to let your emotions affect your judgement. Fear and greed are probably the worst emotions to have in connection with the purchase and sale of stocks.

14. Remember the work of compounding. For example, if you can make 12 per cent a year and reinvest the money back, you will double your money in six years, taxes excluded. Remember the rule of 72: divide your rate of return by 72, which will tell you the number of years it will take you to double your money.

15. Value stocks over bonds. Bonds will limit your gains and inflation will reduce your purchasing power.

16.  Be careful of leverage. It can go against you.