Are you prone to panic-selling your stocks?
If so, you need to change the way you think about them.
Most people think of stocks as lottery tickets, but, in fact, they are pieces of businesses. If you think of a stock as an instrument that produces a dividend, then its price after you purchase it doesn’t matter. After all, you bought it to get dependable income, not to sell it to a “greater fool” (this kind of fool isn’t related to the Motley Fool) in the future.
Or at least that’s the reason you should have bought it. If you’re like most people, you’ve probably bought a stock just to gamble here or there. It happens to the best of us. But if you stick to a conservative investing strategy, you can actually earn long-term profits from your investments. In this article, I will explore four mindsets to help you achieve that goal.
Think of stocks as businesses
The most important mindset you need to adopt to avoid panic-selling stocks is to think of them as businesses. If a stock is just a random number generator, then why shouldn’t it crash even further? From the “lottery” perspective on investing, crashes are scary. But if stocks are businesses, then a decline in the price of a quality stock only means an opportunity to buy more at a better price.
Buy what you know
Another mindset that should prevent you from panic selling is to buy only what you know. If you buy shares in businesses you understand, you’re less likely to think that a declining stock price is meaningful information. So, you can make better investing decisions.
As an example, we can look at Alimentation Couche-Tard (TSX:ATD). It’s a business that most Canadians are familiar with, as the owner of the Circle K gas station chain. Circle K has gas stations/convenience stores in every province. Its business model is very easy to understand: it lures people in with gas and collects extra revenue when they come into the store to buy chips, soda, and lottery tickets. For many people, Alimentation Couche-Tard is a business they can understand. As a result, they are less likely to panic sell it when markets get volatile, as they might be with an obscure junior miner.
Don’t own speculative “long shots”
Another mindset to keep in mind with investing is playing it safe. Everyone likes to gamble on a growth stock every now and then, but holding such stocks at heavy weightings is often a bad idea.
Consider Shopify (TSX:SHOP), for example. A classic growth stock, it has made some shareholders a lot of money. If you’d bought Shopify stock on its initial public offering date in 2015 and held to today, you’d be up about 2,500%. That’s quite a return. However, if you’d bought at the 2021 high ($219) and held to today, you’d be down 66%.
That’s how things go with volatile growth stocks. If you hold them at all, hold them at very small weightings in your portfolio, because you never know what’s going to happen with these names — especially in the short term.
Keep the long term in mind
Speaking of “short term,” a final investing mindset to keep in mind is the opposite of that concept: long-term thinking. You need to own stocks for very long periods of time to make any money in them.
Stock prices are basically random in the short term, which is why 99% of day traders never make any money. Over the long term, however, stock prices correlate with earnings. So, if you’re going to hold stocks, hold shares in businesses you thoroughly understand, and hold on a long time. Remember that over long periods of positive gross domestic product growth, corporate earnings should grow, and adequately diversified stock portfolios should grow in value. This mindset, more than any other, will keep you from panic-selling.