Inside Investing | Jan 20, 2019 02:55AM ET
Last week’s Q&A with Clement was a huge success, so this week our senior analyst Clement Thibault discusses trusting others’ research or doing your own, what defines a defensive stock, and what are the skills one needs to make money in the stock market:
When I choose an investment, should I rely on expert advice, or do all the research myself?
As with many things in life, there is a middle way. You don’t have to choose between only doing your own research, and only listening to expert advice.
First, I’ll open by saying that you should NOT invest in anything because someone told you to without doing your own due diligence. So investing blindly based on expert advice is a bad idea.
However, doing your own market scan and deep dive into stocks takes a long time, and this is where expert advice comes in handy. Experts can give you a general idea of what stocks are interesting to look at, and what they believe are the important metrics to look at. From there, you can start a much more focused research, and decide for yourself if you agree or disagree.
At the end of the day, you and solely you are responsible for your investing decisions. It is, therefore, your judgment call to make, and you can’t rely completely on a third party. However, used correctly, expert advice can help greatly in maximizing the efficiency of your investing
What skills do you need to make money in the stock market?
Making money in the stock market is mostly a combination of three things: research, risk management, and discipline.
On the research side, you do need analytical skills to formulate an opinion on a stock based on numbers. Being gifted helps of course, but with enough dedication, anyone can learn how to read fundamentals and make good judgment calls on stocks.
Risk management is knowing how much you have to invest, what your potential upside, and how much you can afford to lose. No one wins 100% of the time, but with good risk management, even winning 51% of the time can be enough to come out ahead with a nice profit.
As for discipline, controlling your emotions while investing and following your investing thesis (a combination of your research and risk management) allows you to execute your investments and trades without changing course and going off script - which is the easiest way to lose money in the stock market.
If you can perfect those three things, you’ll improve your expected returns tremendously.
As the market wobbles, what defines a defensive stock?
There are two major characteristics that define a defensive stock:
The consumer staples and health care sectors come to mind for our first characteristic, since their revenue is based off on people buying things they need to live. A recession hurts everyone, but the population will still need food, clothes, and medications. Diversified companies are also considered defensive since their business is more resilient.
The stable dividend provides revenue even in a down market, making your returns less dependent on the stock’s appreciation in value. Since we often look for defensive stocks when there is market turmoil, guaranteeing a revenue stream regardless of what the market does gives many investors peace of mind, even as markets go down.
If you have questions of your own you’d like Clement to answer, please leave them in the comments below or send them directly to Clement via Twitter - @ClemThibault.
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