How to Safely Invest in the Stock Market

When I make an investment decision, I think of it in terms of risk and reward. How can I maximize my potential reward and minimize my potential risk? I have been investing in the market now for over 4 years and during that time I have learned many lessons. I've had some amazing gains along the way with 2020 being my best year with a 200% return and Tesla being my best investment with over a 1500% return at its highs. In this article, I will explain some of the lessons I have learned along the way and break them up into principles you can invest by to maximize your gains and minimize your risk.

Lesson 1 - The first thing I would like to tell you is that my number one mistake over the last 4 years has been selling stocks too early. I can't remember any times where I've sold a stock for a significant loss, but there have been countless times where I sell a stock too early and I miss out on a huge amount of gains. Not to mention, if I were to hold those stocks, I would have paid almost half in taxes. Sometimes I have a better stock to invest in and in that case, it totally makes sense to move your money somewhere else. However, sometimes selling is just being greedy or making a poor short-term decision. Some of these examples have been Square and NVIDIA for me. I bought these stocks in early 2019 and sold months later because I thought a 30 or 40% gain in a few months was amazing. 30 or 40% in a few months is fantastic, but if I held those stocks I would be up hundreds of percent right now. So Lesson number 1 is hold your stocks so that you don't miss out on huge gains. If you are investing in a great company, they will continue to grow for years to come. Luckily I avoided making this mistake with Tesla and still own the majority of my shares I was buying in 2018 and 2019.

Lesson 2 - Buy More when the stock drops 15+%. Over the years, I have realized that there is a good chance that the stocks you buy will fall after you buy them. Sometimes you will get lucky and buy at the lowest point and then you can just enjoy the ride up. However, if the stock does dip after you buy it, this is a chance to buy more shares at a cheaper price. I have learned that all stocks can easily fall over 20% from their highs and for small-medium market cap stocks, they can easily fall 50+%, so be careful. Anyhow, this is why it is important to buy around half of the shares you would like to own. I used to start buying after I was only down a few percent and I soon realized that stocks tend to fall a lot more than a few percent. My most traumatic experience with this was CCL or Carnival Cruise Line. This happened because of COVID which was a very rare event and almost impossible to predict, but I was still down over 70% on my position and down thousands of dollars. I continued buying shares as the price dropped and I lowered my cost basis significantly from $35 initially to 24$. Moral of the story is don't buy your entire position at once and wait to buy more once the stock dips at least 15%.

Lesson 3 - Think Long Term. Invest don't gamble. Don't get caught up in short-term thinking. Focus on the future trends, the future of the industry and the role the company will play in that industry's future. I've noticed that successful companies that have significant market share in an industry usually continue to grow for years to come and show great stock market gains. Sometimes great companies will report a bad quarter and the stock will get beaten down way too much. One example of this is ULTA Beauty. In August of 2019, ULTA stock fell 30% after an earnings report and I knew that was easy money. ULTA is a dominant player in the beauty/salon market and I knew the stock would come back. I initially bought in at 227 dollars per share and ended up buying more as the stock went below 200$. Then recently I sold ULTA at 330 dollars per share. Look for the companies that have advantages over their competition, majority market share, a proven business model, and a moat around their business. Sometimes you will also find stocks that are great companies but are beaten down 40 or 50% for other reasons. This is a great chance to buy those stocks and sell once they have reached fair valuations. Some of my best experiences with this have been with companies like Nordstrom, Tapestry, and The Cheesecake Factory. Normally, these turnarounds happen fairly quickly. With the 3 stocks I mentioned above I doubled my money with all of them in a matter of a few months. The bottom line is to think long term and invest in great companies. Don't chase the hype for short-term profit because the long-term game is much more promising then trying to chase a quick buck.