I’m not perfect and success isn’t guaranteed. But in this article, I’m going to share some of my top stock market investing tips. Hopefully, these tips can help investors avoid some of the mistakes I’ve made over the last two decades and get on the path to greater investment success.

Owning 20+ stocks

One of the most important things I’ve learnt over the years is that risk management is vital. It’s crucial to limit big losses because they can really set me back.

One of the easiest ways to reduce risk is to build a diversified portfolio containing many (20+) stocks. If one or two stocks in the portfolio underperform, I can still have success overall.

Thinking about portfolio construction

Portfolio construction is also very important. Here, it’s a good idea to think about both risk and return and allocate capital to stocks accordingly.

It’s generally not a good idea to take large bets on higher-risk, speculative stocks. These kinds of stocks can play a valuable role in a portfolio. However, they should be smaller holdings so that risk is minimised.

Investing globally

The UK has some great companies. However, many of the world’s most dominant companies (Apple, Amazon, etc) are listed overseas. Building a global portfolio is a good idea, in my view. Not only can this approach potentially enhance my returns, but it can also reduce risk.

Investing in high-quality companies

One thing I’m increasingly realising is that investing doesn’t need to be complicated. Invest in great companies at a reasonable price and hold for the long term and I hope to do pretty well.

Great companies come in different shapes and sizes but, in general, they have a few things in common:

• A fantastic product or service

• A competitive advantage

• Strong long-term growth potential

• A strong balance sheet

• A high level of profitability

Looking at ROCE

If I had to pick one metric to focus on however, it would be return on capital employed (ROCE). This is a measure of how profitable a company is. It tells us the amount of profit a company is generating per £1 of capital employed. It’s calculated by dividing operating earnings by capital employed.

The reason this metric is important is that companies with a high ROCE tend to get much bigger over time because they’re earning large profits. And companies that get much bigger over time tend to be good long-term investments.

Don’t stress about valuation

Valuations are important in investing. However, they’re not the be-all and end-all. One thing I’ve learnt over the years is that it’s not a good idea to buy a stock just because it’s cheap. Often, cheap stocks are cheap for a reason (and end up get cheaper).

Similarly, it’s not a good idea to ignore a stock just because it’s a little bit expensive. Many of my best investments have been stocks that were a little bit expensive when I bought them.

The bottom line is that often the best companies have higher valuations, simply because everyone knows they’re great companies worth investing in.

The post After 20 years of buying stocks, here are my top stock market investing tips appeared first on The Motley Fool UK.

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Edward Sheldon owns shares in Apple and Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool UK owns shares of and has recommended Amazon and Apple and recommends the following options: long January 2022 $1920 calls on Amazon, short March 2023 $130 calls on Apple, short January 2022 $1940 calls on Amazon, and long March 2023 $120 calls on Apple. 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.

Large-cap winners

In the large-cap space, one of my best tips for the year has been sportswear specialist JD Sports Fashion. When I covered the stock on 10 January, I said that its forward P/E ratio of 14.2 was a “steal.” Since then, JD shares have risen from 387p to 800p (and climbed into the FTSE 100 in the process), which represents a gain of 107%.

I’ll point out that in the same article, I also said that I’d buy Rightmove shares. Since then, its share price has climbed from 464p to 622p, a gain of 34%. To put these gains in perspective, the FTSE 100 is up just 4% since that article.

Legal & General was another good tip this year. On 26 August, I said that recent share price weakness had created a “fantastic buying opportunity.” Since that article, the shares have risen from around 220p to 284p, a gain of nearly 30%. Not a bad return for a large-cap stock in just over four months.

Mid-cap winners

In the mid-cap space, one of my best tips for the year has been online clothes retailer ASOS. I looked at it on 19 July, after its share price had just crashed due to a profit warning. I noticed that directors were buying shares and I said that a “small position could pay off over the long term.” Since that article, the stock has rebounded from 2,180 to 3,000p, a gain of 38%.

I also tipped rival Boohoo as my top stock for July. Since then, its share price has surged from 212p to 270p (it was as high as 317p last month), a gain of 27%.

Small-cap winners

Gains in the small-cap space have been just as amazing.

On 14 January, I listed technology company Gamma Communications as one of my “top small-cap stock tips for 2019”. Since that article, the stock has risen from 774p to 1,220p, generating a gain of 58%.

Then, on 19 February, I highlighted FX broker Alpha FX as a stock that could “double your money.” Its share price has risen from 660p to 1,090p since, a gain of 65%, so doubling your money is looking like a real possibility.

And on 18 March, I said that support services specialist Restore could “smash the FTSE 100” over the next three years. So far, it’s doing a good job of that. Its share price has risen from 295p to 466p, a gain of 58%, versus a fall of 2% for the Footsie.

Of course, I’ll point out that not every stock tip performed so well. I had some losses too. No one ever gets 100% of their stock tips right. However, overall, there were some great tips this year that could have helped you beat the low returns from the FTSE 100. Tune in next year for more great stock tips like these. 

The post Forget a FTSE 100 tracker. My top 2019 stock tips have generated gains of 107%, 65%, and 58% appeared first on The Motley Fool UK.

More reading

• Why is everyone selling BP shares?
• Is this market correction a once-in-a-decade chance to buy ultra-high-yield income stocks?
• Down 25% in a month! Are these the 3 best stocks to buy in today’s correction… or the worst?
• This FTSE small-cap stock can surge 105%, says one broker
• £10,000 invested in ultra-high yield Legal & General shares on 5 April last year is now worth…

Edward Sheldon owns shares in JD Sports Fashion, Rightmove, Legal & General Group, Alpha FX, ASOS, and Boohoo Group. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended Alpha FX, boohoo group, and Rightmove. 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.