3 Qualities That Help a Fool Beat the Stock Market

Do you know how a Fool beats the market? They possess three qualities needed to succeed in the stock market. 

| More on:
Light bulb with jester hat perched on top

Image source: Getty Images

The equity world can be intimidating with all those technical and fundamental analyses, numbers, and jargon. But as Peter Lynch said, “Behind every stock is a company. Find out what it’s doing.” Once you do that, the rest is market noise. In this article, I will take you through three qualities of a Fool that can help you beat the stock market. 

Stock market decline: It’s normal and nothing to panic about

Many new investors enter stocks to make quick money. Sometimes they panic, book losses, and then leave the market, calling it a gamble. This happens because they enter the market thinking stocks are lottery tickets. Their friends doubled their money, so they think they can. The truth is, stocks are not lottery tickets but investments in a business. Every business faces ups and downs. 

It’s important to set realistic expectations. No one can time the market, but some get lucky with their first-time bets. For instance, those who’d bought Hive Blockchain Technologies (TSXV:HIVE) in early 2020 saw their $1,000 become $30,000 in 18 months. John purchased the stock in February after looking at his friend’s portfolio. But his $1,000 became $575, because John invested in the stock without understanding Hive’s business. 

Remember, stocks decline. It’s the way the stock market works. Hive is a cyclical stock, and earns its revenue from mining cryptocurrencies like Bitcoin and Ethereum. Bitcoin was in a cyclical upturn in February, as Elon Musk said that Tesla is considering accepting payments in Bitcoin. But a regulatory crackdown pulled BTC’s price down, and Hive’s stock fell over 40%. 

But Hive is exploring new applications for blockchain technology. Moreover, many country’s regulators are gradually opening up to the idea of BTC. It will take time to build an ecosystem for crypto, as a global currency is the need of the digital world. Hive is an old player in blockchain and has a strong BTC reserve. If you learn this, you will be ready for the dip and won’t panic. Instead, you will buy the stock at the dip, hoping to make money in the next crypto cycle in three to five years. 

Skim stock recommendations carefully to build a diversified portfolio 

When you buy a stock, know its business. Here’s an example of what I mean: when you hire an employee, you check their background, skill set, strengths, and weaknesses. A company needs a technical person, an accountant, and an operations person. A diversified skill set is what sets the company running. Not all employees are the best at their work, and some are even misfits. 

Similarly, a portfolio needs diversified stocks with different skills. Some shares are good at growth, some at dividends, some are resilient, and some are future growth stocks. Skim through the stock recommendations and build a portfolio depending on your needs. For instance, a tech company will have more data scientists and fewer financial experts. Similarly, an investment bank will have more financial experts and fewer technical experts. 

Analyze your needs and allocate your funds accordingly. A good dividend stock is BCE (TSX:BCE)(NYSE:BCE). This Canadian telecom giant earns regular cash flows from subscriptions and pays quarterly dividends. Don’t expect much capital appreciation from this stock, as its skill is paying incremental dividends. 

BCE has increased dividends at a compounded annual rate of 6.4% in the last 10 years. It is now accelerating its investment in broadband and 5G infrastructure to get more subscriptions and cash flow. This hints that BCE has the potential to grow its dividend per share in the coming years. 

Invest regularly but don’t invest all your savings in stocks

Once you have prepared yourself for investing, select the stocks and invest regularly. You can put in $500 a month in your Tax-Free Savings Account (TFSA) and buy the shares you have shortlisted. When the market dips, invest more in the shares of your choice to reduce your overall purchase cost. After all, profit is the selling price minus cost price. 

Fool’s advice

Don’t panic when the stock dips, and don’t buy when the stock is rallying significantly. This is how an efficient market should work, but markets are inefficient, and these inefficiencies are your window of opportunity to make a profit. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Tesla.

More on Dividend Stocks

Gas pipelines
Dividend Stocks

3 Stocks for High-Yield Income Each Month

Are you seeking passive income? Consider investing in these high-yield TSX dividend stocks now.

Read more »

edit Colleagues chat over ketchup chips
Dividend Stocks

2 Dividend Stocks for Beginner Investors in March 2023

Are you a new investor looking for great dividend stocks to buy? Here are two top picks!

Read more »

Hour glass and calendar concept for time slipping away for important appointment date, schedule and deadline
Dividend Stocks

Need $500 in Passive Income Each Month? These 2 TSX Stocks Are Your Top Bets

You can create a robust monthly dividend income portfolio around SmartCentres REIT, and another top passive income play today.

Read more »

A worker gives a business presentation.
Dividend Stocks

2 TSX Dividend Stocks to Buy Today and Hold for the Next 5 Years

These TSX industry leaders look cheap today and pay attractive dividends that should continue to grow.

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

3 Dividend Stocks to Buy Before the End of March

These dividend stocks all have earnings coming up that could see share prices rise higher, so get in on a…

Read more »

grow dividends
Dividend Stocks

5 Canadian Dividend Stocks With Yields of 5% or More

Here are five of the best dividend stocks Canadian investors can buy to boost their passive income in the current…

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

Looking for $200/Month in Alternative Income? Buy 2,000 Shares of This Stock

Here’s a renewable energy-focused monthly dividend stock you can buy now to create a reliable source of alternative income in…

Read more »

Dividend Stocks

Why I Continue Buying Shares of This Magnificent Dividend Stock Hand Over Fist

This glorious dividend stock is a buy in all market situations. It not only gives you market returns but also…

Read more »