If I told you that investing in stocks through a strict process could result in over 90% returns in just eight months, would you believe me? Would you follow my process? Well, that's what I've done, and I'm going to show you how.
On March 20, 2020, I opened up an investment account with $250 to start, and I add just $50 per week every Monday to invest it into individual companies.
Why $50? Because I want to demonstrate that investors don't need a lot of money to invest in stocks. You can start with just $5 per week, $50 per week, $500 per week, or $5,000 per week – the results are scalable. It's been eight months so far, and the results have been satisfying, to say the least.
This process doesn't guarantee anything. If you're looking for guaranteed growth, you're hunting unicorns! In other words, they don't exist! And neither do guarantees when it comes to investing. However, this is the process I have used to beat the stock market. Maybe it will help you too!
Over 90% Growth in Eight Months!
Before we get started, keep in mind that this portfolio is only 8 months old. Chances are that these returns will average out over the years to a lower annual return. However, I use this same process for all of my investment accounts and have beaten the market for years.
To give you an idea of how this portfolio compares to average market returns, I've compared my portfolio to three major indexes during the same period from March 20, 2020, to November 23, 2020.
Market Indices Growth from March 20, 2020, until November 23, 2020:
- S&P 500: Tracks 500 of the largest companies and makes up about 80% of the entire stock market. This index has grown approximately 54.35%
- Dow Jones Industrial Average (DJIA): Tracks 30 large companies in the United States and has been used as a form of market measurement for ages. This index has grown approximately 52.62%
- NASDAQ: An index including almost every stock on the NASDAQ stock market exchange. This exchange primarily includes technology and internet-related companies, among others as well. This index has grown approximately 72.32%
In other words, we beat the S&P 500 index by about 33%, the DJIA by about 35%, and the NASDAQ by 15%. By showing you this, my intentions are NOT to pat myself on the back (OK, maybe a little). But I AM showing you how having a strict set of investment rules to follow regularly can result in significant returns.
Keep in mind these are not standard market returns. On average, the S&P 500 grows about 8% to 10% yearly. As of this writing, we're amidst a global pandemic, and most investors tend to sell their shares during volatile markets.
Had you kept your money invested the whole year, you'd still be loving the stock market! And, to those of you who claim my portfolio returns are due to lucky timing, I ask you, then why didn't you invest when the market was on sale?! We'll discuss more of this later on how to spot buying opportunities.
Here's My Portfolio…
My account is with Fidelity investments, and here is a screenshot as of November 23, 2020.
Note: Click the image to enlarge the picture. It will open in a separate tab on your browser.
I've invested about $2,052.48, and it's turned into $3,914.72, or a 90.78% growth. During these eight months, I've followed these seven tactics religiously.
Seven Steps I Follow to Beat the Stock Market
I've narrowed down the seven most important things that I follow every week that directly contribute to a booming portfolio (thus far). They are:
- Let the runners run
- Spot buying opportunities
- Invest in what you know
I'll explain each of these in greater detail below.
1. Have A Defined Process
Having a defined process is fundamental. Define limits such as your budget, how often you'll invest, and your requirements for a company to be included in your portfolio. Consider other parameters like your time horizon, when to sell, and how many stocks to own.
For me, I invest in companies with the following characteristics:
- They have market caps of between $1 billion and $100 billion. I look for stocks with a lot of growing room.
- They have high amounts of cash relative to their debt (generally, I try to make sure they have less debt than cash, but on rare occasions, I accept debt up to two or three times the amount of cash on hand).
- They have an industry moat or competitive advantage that makes it difficult to compete against
- They are a company that provides a product or service that I use or have used and am overly excited about.
- They have a great founder/CEO as its leader.
- They have continually growing revenue and earnings.
I invest for the long term, and I don't sell unless the company changes its business approach that goes against my preferences or beliefs.
2. Invest Consistently
Being consistent means deciding now to invest for the long term and deciding to make regular investments no matter what. Growth will be slow at first, but compound interest will be your best friend over time.
Set up automatic deposits, automatic investments, and turn things into a habit as ingrained as brushing your teeth. You do it without even thinking because it's part of your day!
3. Diversify Your Portfolio
Diversification means not putting all your money into one company. I aim to have at least ten companies and a maximum of 25 companies in my portfolio. Enough to diversify from company failures yet not too many companies to spread my gains too thin.
Let me explain. If I invest in 1,000 companies, and one company has outstanding returns, my portfolio growth will be minimal because that one company only makes up 1/1000th of my portfolio. But if I invest in just 15 or 20 companies that I thoroughly vet, and one company takes off with exceptional returns, my portfolio is affected significantly.
Truly diversifying means including companies with market-caps (sizes), different industries, and even different geographic locations.
4. Let the Runners Run!
Market experts/analysts often call great companies that are growing rapidly “overpriced” for years on end. If they keep growing, that's usually a sign to keep investing more money.
Shopify was said to be “overpriced” at $400 per share not too long ago. Now they're double that value. Analysts said Amazon was overpriced for years. Now they're worth over $1 trillion! Imagine if you owned shares of either of these companies and kept investing more. You'd be rich!
Consider this: If you were placing a bet on what team will win the soccer game, chances are you'd put your money on the team with a winning track record. Don't get me wrong; I DO NOT believe that investing is like betting – because it is totally different – but this concept is the same and still applies to investing.
You'll notice that your portfolio becomes heavily invested in a handful of companies over time due to explosive growth. That's OK!
5. Spot Buying Opportunities
Buying stocks is much like retail shopping. When you spot a good deal, you take advantage of it. Black Friday is a great example when everything goes on majorly discounted sales!
Three indicators of potential buying opportunities are sentimental market movements (based on emotion and not logic), major economic events that affect the stock market, and insider transactions.
Sentimental market movements are when a stock or the entire market moves in one direction entirely based on fear or emotion. For example, Fiverr dropped over 20% in just days because of the news of a vaccine for COVID19. But nothing about the business has actually changed. They didn't have declining growth, employee layoffs, lawsuits, etc. It just dropped out of thin air. I took advantage and bought more, and shortly it reached new all-time highs in just a week or two of time!
Economic events such as the pandemic, for example, are great buying opportunities. If you have vetted your companies thoroughly, you can be confident they will withstand any market condition. You should buy more when their prices are low, which often occurs during a significant economic event.
The truth is that every market correction, downturn, or recession has always bounced back to new highs. That's why investing for the long term pays off!
Insider transactions are when company executives such as CEO's and executive staff buy more shares of that company. This often indicates they expect the company's value to increase in the near future. They must disclose their investment transactions to the public, so you can see when company executives buy more company shares. Use this strategy with caution due to its partly speculative nature.
6. Keep Educating Yourself
I've learned most of my knowledge from firsthand experience with over a decade of working in finance. I've also learned a great deal of knowledge by being a part of reputable stock clubs like The Motley Fool or MyWallSt and subscribing to premium content like Yahoo Finance or The Wall Street Journal.
Furthermore, learning from world-class investors like Warren Buffet and Peter Lynch have been huge for my learning. Consider reading books like Buffettology or One Up on Wall Street to get timeless details on their strategies that made them wealthy. Lastly, I've certainly tried to always learn from my own mistakes. These self-educating tactics have taught me a great deal about building a successful stock portfolio.
7. Invest in What You Know & Love!
You'll notice all the companies that I own are companies that I have a solid relationship with due to being a loyal customer. I use each company's products or services almost daily and love them to death. A company with a popular product or service is often a sign that the company may be a great investment opportunity. Why? Because if you like them so much, the chances are that many others do too.
Here are some examples…
- Gig economy: My income comes primarily from freelancing and side hustles. I knew the value of Fiverr when it was under $30 per share, so I bought.
- Real estate: I am familiar with real estate investing and know the value of a platform like Zillow for both investors and real estate agents, so I bought Zillow!
- Technology: I have a ROKU device on every TV. I use my Apple Watch, iPhone, AirPods, and apple subscriptions daily. So, I own shares of both!
- Products I use: I don't shop in person for clothes and love the idea of having new styles sent to me with Stitch Fix. I invested.
- Fitness: I love fitness and hate the time it takes traveling to and from a gym. I tried Peloton and fell in love. Then I became a shareholder.
I've even made it a rule that I only invest in companies whose products I have personally used, or at least tested out. Here's an example. At first, I was skeptical about investing in Peloton because there are so many fitness apps out there. But they have excellent financials and a great brand reputation, so I tested out the fitness app.
After trying their live, at-home workouts, I fell in love and even canceled my gym membership because I loved it so much! I discovered what sets them apart from other fitness apps and had a great customer experience. I am now an investor in Peloton and will be for years to come.
Following these seven steps can result in market-beating returns. Does it guarantee extreme growth like this? Absolutely not. But it makes investing exciting and rewarding. As a refresher, here are the seven steps I follow closely:
- Define your process
- Invest consistently
- Diversify your portfolio
- Let the runners run (bet on the team with the best track record)
- Take advantage of buying opportunities
- Invest in companies you understand, use, and love
This process has given me over 90% growth in just eight months. Maybe you will see similar results! When all is said and done, tailor your process to your risk tolerance, investment preferences, beliefs, and style. It makes the process exciting and rewarding.