Many investors believe that if you want to win in the stock market, you have to have inside stock tips that no one else knows about. But if you want real stock tips that won't land you in jail yet will still deliver long-term results, you don't have to resort to whispered conversations in dark corners. Following a few simple tips can give you the returns you need in order to reach your financial goals.
Tip 1: Don't rely on the big score.
The first idea most people have about stock tips is that once you hear about a great stock, you should invest every penny you have in it. Indeed, many of the richest people in the world owe much of their wealth to having invested not only their money but their lives in a single company.
But for every investor who's made a killing picking the perfect stock, there are several more who lost everything because they had all their eggs in one basket. By diversifying your portfolio across several different stocks, you can still profit from your great calls, but you don't risk your entire life savings if something unexpected happens to hurt one of the stocks you've chosen.
Tip 2: Look beyond labels.
Many investors categorize themselves by what they like to look for in a stock. Value investors tend to seek out cheap bargain stocks, while growth investors are willing to pay up for faster growth. As a result, stocks tend to get pigeonholed according to which group fits its characteristics best.
If you rule out stocks based only on labels, you'll miss some great prospects. For instance, many growth investors have abandoned tech stalwarts Cisco (NASDAQ:CSCO) and Intel (NASDAQ:INTC) because their hypergrowth periods are long behind them. But with their shares trading at very low multiples, they don't have to grow in order to provide reasonable returns as value stocks, especially with attractive dividend yields. Similarly, several years ago, Crocs (NASDAQ:CROX) was left for dead as not having any of the characteristics value investors generally like. Yet the company engineered a turnaround and returned to strong growth. Only if you look beyond labels can you give yourself the best chance at success.
Tip 3: Think long-term, but don't be afraid to act short-term.
One frequent criticism of buy-and-hold investing is that it's perceived as buy-and-hold-forever. Warren Buffett may have said his favorite holding period is forever, but he has never been afraid to sell a stock that stopped doing what he thought it should, and you shouldn't fear selling either.
The key is to know why you bought a stock. That way, if that reason ceases to be true, you'll have an automatic indicator of when to sell. Without that reason, you'll simply be reacting based on emotion, and that's always a bad way to make any investing decision.
Tip 4: Be a penny-pincher.
It may not seem worth it to shop around for the lowest brokerage commission on stocks or the cheapest mutual fund or exchange-traded fund. But fractions of a percentage point add up over time, and keeping money in your pocket rather than letting it go to your financial institution can make a huge difference to the size of your nest egg after years of investing.
That doesn't mean you should always skimp, especially if you're getting a unique opportunity with your money. But often, you'll find very similar options at much different prices. For instance, until very recently, both Vanguard Emerging Markets (NYSEMKT:VWO) and iShares Emerging Markets (NYSEMKT:EEM) tracked the same underlying index and mostly owned the same stocks. Yet the Vanguard fund charged about a third what the iShares fund did. Even considering other cost factors, there was little reason for long-term investors to pay higher expenses.
Tip 5: Be humble.
No matter how long you invest in stocks, never stop trying to learn new things. Between innovative financial products and unprecedented market conditions, it's a lot of work to keep up to speed on the investing world. But as long as you never think you've learned everything you need to know, you'll be open to new experiences that can open up profitable opportunities.
Tips to live by
These stock tips may not give you inside information, but they nevertheless have the potential to change your investing life. Follow them and you'll greatly improve your chances of succeeding with your investments.
Fool contributor Dan Caplinger owns shares of Vanguard Emerging Markets ETF. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Cisco Systems and Intel. The Motley Fool owns shares of Crocs and Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.