MANILA, Philippines – To be a successful stock trader, you must first get into the mindset that you won’t simply get rich through trading stocks, a financial analyst said.
Andrew Stotz, the president of CFA Society Thailand, said there is a good reason why most of the world’s 500 richest people listed by Forbes are not stock traders.
“What you find is that the people who get rich in this world get rich from building successful businesses. That’s where real wealth is generated. It doesn’t come from the stock market,” he told ANC’s “On The Money.”
Stotz cited American billionaire Warren Buffet, who ranks high among the world’s billionaires, as a business owner “who only uses the stock market as a place to buy and sell.”
Investing in the stock market, Stotz said, is about protecting your wealth while also trying to get a decent return.
“If you can go into investing by realizing ‘I’m not getting rich from this,’ now you have the right mindset to invest. If you go in thinking I’m going to get rich from this, that doesn’t happen,” he said.
According to Stotz, the 5 major factors that determine return are inflation, dividends, growth in book value, possibility share price dilution, and the “dream factor.”
“Take any stock and let’s say last year people were willing to pay 10 in price for one in earnings. A year later they’re willing to pay 15 in price for one in earnings. What has changed? That inflation in the PE or other metrics is what I call the ‘dream factor,’” Stotz explained.
He warned, however, that when price-to-earnings ratio gets higher than 15 times, then the stock trader should realize that the “dream factor” can turn into a nightmare.
“The amazing thing about the stock market is that it’s so complex, you can never develop a rule. There is no rule that consistently works so you have to be aware of shifting sands,” he said.
“When investing in stocks, we ought to rely less on predicting the future. Know where we are today and where the market has been in the past. Predicting the future gives you a false sense of security,” he added.