The biggest lie you'll ever hear in the stock market is that: “As a private investor you're not smart enough, and you lack the information to invest and make money on the stock market.”
It's a lie presented by fund managers, personal financial advisers and media analysts alike.
Obviously, they don't say it quite like this, but it's what they mean.
The essence behind their big lie is: They want you to follow their traditional, conservative approach to investing. When you invest in their unit trusts and overly expensive investment products they get paid massive fees to give you average performance.
But there are better ways to grow your wealth than this.
That's why I'd like to share with you four ‘must know' facts that'll help you make more money on the markets.
Must know investment factor #1 – Invest where the real gains are found
Just suppose in 1996 you inherited R200,000. So, you decided to put it to work in the stock market.
If you weren’t sure what the best place for great gains was, you might have decided to go for a safe approach and split your money into three main categories.
If you invest R100,000 in a broad range of large cap companies and you invest the other R100,000 in the very smallest shares on the JSE, small cap shares. Let’s jump forward to 2016.
Assuming you had achieved an average return from these different asset classes your R100,000 invested into large company shares would be worth R770,842. Sounds great, right?
Well, that’s what you would’ve gotten invested in an ETF. Plus, most fund manager fees would’ve probably reduced that figure. But here’s where it gets mind boggling.
Small cap shares turned R100,000 into R1,100,787 in 20 years!
Had you invested R100,000 in small shares like the ones on the Small-Cap index in 1996, your money would be sitting at R1,100,787 today.
How’s that for massive outperformance, R329,945 extra cash in your pocket – on a mere R100,000 investment!
Must know investment factor #2 - Follow the story for exponential gains
SO now you know, you must put your money in small cap shares to get truly amazing performance. And to get exponential gains you must target a special – select group of penny shares. Like the ones, I pick for my Red Hot Penny Shares
My strategy looks at several factors, but the most important one to me is the Wow Factor!
Ultimately, this factor is “the story”.
If a share’s likely to perform well, it’s usually one with a great story behind it, a catalyst for growth.
The story could be the restructuring and refocusing of the business into a new, niche market or it could be a tale of recovery from the brink of a disaster. (Take note, the pin-striped brigade often despises and overlooks these recovery stocks.) The story could even be about a new acquisition, an exciting expansion into new countries or simply a spectacular exploration find.
The story is the catalyst that’ll drive massive gains going forward. And without this your investment is doomed.
Must know investment factor #3 – The price is everything
You don’t want to buy into a share once the story’s played out, or if it is too expensive for the growth to come. You want to buy it while it’s still cheap.
That means you’ll have to invest in a share before you can be sure how its story plays out – but the risk is well worth the returns you could pocket in a short time! My Profit Potential Indicator will tell you exactly what the share I’m looking at is worth. It’s as simple as that to identify a real bargain!
You simply take the estimated earnings per share – for the following year and times that by the average PE ratio of the share. This will give you a target price on the share which will show you whether it is worth investing or not.
Must know investment factor #4 –You don’t have to hold onto a share forever
Once you’ve found a share with a story you like. And great profit potential there’s only one important thing left to do. You need to keep your eye on the goal: That’s the target price for the share.
You must keep in mind the story or catalyst that made you buy the share and if this story is still playing out – or has a good chance to play out, you hold onto the share.
If you bought a mining company because of a big new mine, it would develop and the company announces it doesn’t have the cash to continue developing the mine – then there’s no use holding on. But if it says development is on track then it’ll be worth the six or twelve months you’ll wait for the share price to shoot up!
By following this rule, you won’t sell too quickly, or hold on to losers for too long. But also, remember, just because your share’s having a bad day doesn’t mean you should sell it.
Being aware of these investment factors will help you beat the market with higher performing shares, and less stress at the end of the day.
Here’s to unleashing real value
Editor, Red Hot Penny Shares