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Building wealth through investing: preparation is key to getting started

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Buy low, sell high, that’s the way to make money investing in the stock market. Sounds easy. But of course, there’s no such thing as easy money. Nevertheless, it is possible to make money in the stock market, millions even, when following a sensible strategy. And that strategy begins with preparation.

Commit to an investing strategy

Billionaire investors like Warren Buffett, Ray Dalio and Jim Rogers each have slightly different routes to riches, but what they have in common is a commitment to their chosen strategy.

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Buffett’s preferred strategy is value investing or buying stocks below their intrinsic value. This effectively means buying when the share price is cheaper than the business is feasibly worth.

Sometimes, good-quality companies go through a bad period and their share price tanks. This may be through no fault of their own. The coronavirus, for instance, panicked investors and the share prices of many quality companies immediately fell. Investors who jumped on those stocks spotted value and bought when the prices were undervalued.

External and internal factors to consider

The pandemic is an extreme example, but this kind of thing happens all the time. For instance, if the oil price drops then oil companies across the board see their share prices declining. If the company has staying power and the ability to survive the downturn, then it’s a good buy, because its share price will ultimately recover.

The same goes for every sector. Banking stocks have been out of favour not just because of Covid-19. Prior to that, the 2008 financial crisis caused sentiment in the banking sector to plummet. Then the low-interest-rate environment in recent years led banks to struggle to grow profits. Investors ultimately want to invest in progressively profitable stocks, so banking shares have suffered.

I’m not a fan of traditional banking stocks, but like any sector, there are stalwarts that will go the distance. If savvy stock pickers can pinpoint these and buy them below intrinsic value, they’ll benefit when the world emerges from the pandemic and interest rates rise again.

Every sector has its ups and downs. And every company faces a mixture of external and internal challenges. Savvy investors will look closely at a business’s circumstances and carefully weigh up the pros and cons before investing.

Slow and steady

I think there’s a lot to like about stock market investing and best of all it allows me to take control of my own financial future. My strategy involves holding a diversified mixture of stocks and funds. I take my time to research a stock before buying shares and I opt for companies I understand and like.

By investing regularly, I hope to gradually build a nest egg for the future. The fundamental things I look for when evaluating a stock include:

  • An established business with a track record
  • A management team that keeps shareholder interests aligned with their own.
  • A reasonable price-to-earnings ratio
  • A competitive edge
  • A dividend
  • Room for growth

Being an active investor is not easy, but having a logical strategy in mind goes a long way to simplifying the process. I think lifelong learning is key. The more I read and learn about the sectors or companies I’m interested in, the better prepared I’ll be as an investor.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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