Let’s talk about 3 stock market investing strategies for beginners. Right now the markets are making new all-time highs.
The S&P is pretty much up, up, and away. So how can you take advantage of this?
I want to show you 3 strategies that you can use in your trading right away, but first, let’s define what is a strategy.
What Is A Trading Strategy?
Well, a strategy is different than just listening to the talking heads on TV, or maybe on an Internet forum where they say, “buy this.”
With a strategy you know what to trade, you know when to enter, and you know when to exit. So a trading strategy has a little bit more discipline built into this.
Now let’s talk about three popular trading strategies.
Stock Market Investing Strategies For Beginners #1: Value Investing
The first stock market investing strategy for beginners that you can use is value investing. This is pretty much what Warren Buffett and Charlie Munger do.
This is where they are buying stocks that are good for the long run. The idea here is, you only invest in what you understand. I think this is a direct quote from Warren Buffett who said, “Just invest in what you understand.” I believe it was Peter Lynch who said, “Well, just invest in what you are using every day.”
So let me show you some of the value stocks that Warren Buffett is probably interested in, that you might be interested in too.
The first one is Target. If we take a look at the chart, we see that target is pretty much for the past few years up, up, and away. It has been up the last three years since 2018.
Everybody is shopping at Target, therefore this is good for value investing. I’ll tell you the pros and cons and the other two investing strategies here in a moment as well.
Why do I call it investing? Because it’s basically a buy and hold strategy, and I want to show you a few more examples.
Now, the drawdowns here are that you are actually experiencing some drawdown. It can happen that with this stock, your portfolio might be down 20 or 30%, but over the long run, as you can see, Target here moved from $60 in the last three years to right now $262.
Let me give you a few other examples. What else do you do every day? As an example, you use a cell phone, right? I’m using an Apple device, so let’s take a look at Apple (AAPL).
Looking at a chart, you see it’s the same picture, right? Apple is up, up, and away with some drawdowns that we have along the way. Three years ago, Apple has been trading split adjusted around $45, and today at $146. Almost tripled in three years.
What else are you using every single day? I stream almost every day on YouTube. Parent company would be Alphabet (GOOG), which is Google, and you probably use Google every single day. As you can see above, also very, very typical value investing.
What some people do with value investing is, they combine it with dividend investing, looking for companies that pay a high dividend. But with dividend investing, you usually get a few percent a year. Some say Google is more growth investing, but I think it’s also value investing because we’re using it.
Another good example is Home Depot (HD). Home Depot is a stock that definitely qualifies as value investing, and if you look back over the last three years, we also see that in 201 it was trading at around $160. Right now, it is trading at $329.
If something is doubling or tripling in a year, that’s pretty good. I believe it was Peter Lynch who said, “Just look around you and look what is in your pantry. Look what you’re doing every day, what you’re using, and buy these kinds of stocks.”
So this is what some people do.
Stock Market Investing Strategy #2: Growth Investing
On the other hand, number two, we have growth investing. This is where you’re investing in companies with growth potential. Sometimes they are not yet profitable. The idea is that you’re becoming an early investor.
Let me give you a few examples here. Now they are profitable, but Facebook (FB) was definitely a growth company in the beginning.
Tesla (TSLA), as you know, which is the Cinderella story of the electric vehicle makers, at some point trading split adjusted probably $40 here, now at $714.
It doesn’t come without risk because as you can see, there were several drawdowns along the way and it has pulled back from $900. So you’re really more like an early investor.
A few others here, ETSY for example, would also be in this category of growth investing.
Again, the idea is to invest in companies that have growth potential. Now, Etsy is also a profitable company now, but as you can imagine, if you’re going back to 2016, if you just look at the chart here we see that Etsy was trading at around $8, And today, five years later, they’re at $182.
Here with these growth companies, we’re no longer looking for doubling over a year or tripling over three years. We’re looking for 10x or 20x.
Another company in this category is UBER. Uber just started trading in June 2019, a relatively young company here. They are currently trading at around $43, so you’re getting in in the very, very early stages here, this is what we call growth investing.
Let me give you two more examples. Airbnb (ABNB), also a company that just recently started trading. They started late in 2020. The IPO price here was at around $140, and right now they’re trading at $149. So you’re not making a whole lot, but the idea is to get in early here.
The last example that falls in the category here is COIN. And again, with these growth companies they do come with risk, but the idea is that they are going up 20x, 30x.
This is riskier than value investing, as investing in a company like Target, Walmart, Google or Apple is almost a sure thing.
I mean, even Amazon. Amazon recently dropping a little bit, but if we just zoom out here and see what happened over the last three years, then you know that Amazon is another company that’s up, up, and away.
These are two ways, now I want to show you the third way and how to do this.
Stock Market Investing Strategy #3: Trading
The third way of investing is trading, or technical trading. What does this mean? Technical trading means where you’re looking less at the fundamentals, and you’re looking at indicators.
This is what I like to do with the PowerX Strategy. I like to look at three indicators, the RSI, the stochastics and the MACD.
In this case, you’re not concerned about what the underlying company does, instead, you’re just looking at the indicators, and your outlook is also rather short.
With technical trading, your investment horizon is usually just a few days to a few weeks. While with the investing styles that we talked about earlier, whether it is value investing or growth investing, it’s usually several months and often years.
What’s Warren Buffett’s horizon for investing? It is usually THIRTY YEARS!
Let’s briefly talk about the strategies that I personally use and then I’ll show you how you can do them. I’ll show you three ways from the laziest to the most involved.
If we talk about, for example, number one, value investing, this is where I’m using a strategy that is called The Wheel Strategy. The idea here is to buy stocks at a discount, and we are doing this by selling puts.
Let me show you exactly what I did with a trade I was recently in with UAL. What I did is that I sold the 43 put.
What does this mean? It means that I can buy shares for UAL at $43, and as you can see, they were trading at about $46. For me, that is a pretty good discount.
Is UAL, United Airlines, a value stock? Well, I definitely don’t consider this to be a growth stock.
If we are just looking back on our horizon here over the past ten years, UAL went from $20 up to $100. This is a 5x over 10 years, or if you just look over the past few years, back in 2018 they were trading at $60 up to $100. So that’s around the 2x which I consider value stocks. That’s what I do with The Wheel Strategy.
With The Wheel Strategy, I’m mainly looking for number one, what we talked about, value stocks.
Number two, how do I personally invest in growth stocks? This is where I’m combining number two and number three, because this is where I use the PowerX Strategy. I’m not smart enough to decide whether Uber will go to $200, $300, or even $400.
I like to look at the indicators. For me, they’re providing an objective view on the markets of whether I should buy, sell or hold. Again, my horizon here is just a few days to a few weeks. At most I’m usually in a stock here between 8 to 20 days, so about one to three weeks.
How To Use These Stock Market Investing Strategies For Beginners
Let’s talk about how you can do these things. Let me show you the lazy way to invest in, for example, value stocks. The lazy way is that you can just buy some mutual funds or ETFs.
As an example, the SPY is an ETF that you can for $442 and it is mirroring the S&P 500. As you can see above, the S&P 500 right now (at the time of this writing) is trading at $4,432. So the SPY is trading at approximately one-tenth.
If you’re investing in an index fund like this, over time your investment will go up. Of course you will have the drawdowns that come with the overall market, but if we go from 2012 to 2021, the SPY went from around $120 to $442. This is pretty much in line with the market.
If you want to trade the Dow Jones, ETF here is the diamonds DIA.
Or, if you want to trade the more aggressive Nasdaq, that is QQQ.
You can also trade bonds or longer-term yields. TLT, for example, is mirroring the 20-year bonds and that’s what you could do if you are into bonds. I would say if you’re really lazy and don’t want to mess around with trading, this would be a way to go.
You could also go with certain indices or sectors. For example, GLD is the spider gold trust. So this is mirroring gold. If you don’t want to buy physical gold, you can do this.
Or you can go with one of the more aggressive ones, Cathie Wood’s Ark Innovation Fund.
This innovation fund is investing in growth stocks, so you need to know what they do. Some growth stock examples are DKNG, which is Draft Kings, I believe she also recently invested into HOOD, which is Robinhood, and heavily invested in Tesla. So this is a fund that is pretty much investing in very aggressive growth stocks.
Now, if you prefer to invest in real estate without actually investing in real estate, there’s VNQ, which is Vanguard’s real estate investment trust. As you can see, this is also over time, nicely going up. I mean, it’s not as aggressive, but as you can see over the last ten years from around $48 to $106.
What is another way? I said you can do this in three ways and I’m going from laziest to most active.
The laziest way is just to buy these ETFs or funds. The next one is stocks, and I gave you some examples of stocks that you could invest in, whether you want to go for growth stocks or whether you want to go for value stocks.
And now, as a bonus, what we can do is also use options. And if you’re new to options, I made a playlist. It’s called Options 101 and you can watch it HERE.
Options are perfect for smaller accounts.
I think that options are fascinating because, especially when you’re buying options, they have limited risk and pretty high reward potential here.
In a nutshell, we talked about 3 stock market investing strategies for beginners.
One being investing in value stocks. Dividend investing is a subcategory of this.
Number two, investing in growth stocks.
And then number three, technical trading. We talked about the three ways to do it so you can either do it, number one, through investing in ETFs and funds. Number two, buying stocks outright, or actually going for options, which is even more fun. And this is what I personally like to do.
The most important thing is that a trading strategy has 3 things that you need to write down.
That is what to trade. Are you trading value stocks or growth stocks? Or maybe a mixture of both?
Number two, when exactly do you enter, and you could use technical indicators as I do, or you could just use fundamentals, or maybe you listen to other people, which I think is the worst thing to trade or invest.
And number three is when do you exit? Meaning, when do you take profits?
I hope you found this article on stock market investing strategies for beginners helpful. If you did, feel free to leave a comment below.
To learn more about the Wheel Strategy, check out the playlist I’ve created HERE
And to learn more about The PowerX Strategy, you can learn more HERE