Making Money in the Stock Market Is Easy — If You Avoid This 1 Thing

This post was originally published on this site

As economist Burton Malkiel, author of the investing classic A Random Walk Down Wall Street, says: “It is not hard to make money in the market. What is hard to avoid is the alluring temptation to throw your money away on short, get-rich-quick speculative binges.”

Investing in the stock market can be as simple or complicated as you make it out to be. You can hand-pick dozens of stocks in your portfolio and aggressively trade every day. You can also hold a single exchange-traded fund (ETF) that mirrors the S&P 500 and hang on to that investment forever. You can make money both ways, although your returns and risk will vary significantly.

Image source: Getty Images.

Meme stocks can be speculative binges

While you can certainly make a case for meme stocks being good long-term investments, the temptation for many investors these days is to try and make a significant amount of money in a very short time. And in the near term, stocks can be very erratic. A good example of that is Ocugen (NASDAQ:OCGN). The biotech company only recorded revenue last year for work that it was doing to help fellow biotech Advaite develop a COVID-19 testing kit. And at just $42,620, it was minuscule compared to Ocugen’s net losses, which totaled $22 million.

Without much of an established business, investors have been speculating on the success of a COVID-19 vaccine candidate, Covaxin, that Ocugen is co-developing with Indian company Bharat Biotech. But even if it’s successful, a vaccine may be too little too late, given that half of Americans have already received at least one dose. Under its agreement with Bharat, Ocugen will share in 45% of the profits from vaccine sales in the U.S. market; this has recently been expanded to also include Canada (58% of people there have received at least one dose of a vaccine). Covaxin has not been approved in either market, although Ocugen plans to submit a request for emergency use approval to the U.S. Food and Drug Administration as early as this month.  

Despite what could prove to be limited profits to share, investors are buying up the stock as if it will generate billions in revenue; shares of Ocugen are up over 460% this year, while the S&P 500 has risen only 12%. Contrast that with a much safer stock like DexCom (NASDAQ:DXCM) that generates billions in revenue and posts actual profits — its shares are up by just 5% in the same time. 

Safe investments may be boring, but they don’t put you at significant risk

Investing in a medical device company like DexCom — it’s in the business of helping people with diabetes — is a much safer bet over the long term. Projections from the American Diabetes Association suggest that the disease will be much more prevalent in the future — the number of diabetes patients in the U.S. in 2000, approximately 11 million, is expected to nearly double to 20 million in 2025. And in 2050 there could be as many as 29 million Americans living with the disease.

DexCom and its continuous glucose monitoring systems help people stay on top of their glucose levels, and demand for these products will remain strong for the foreseeable future; there isn’t much guessing or speculation involved with the business. And while that safety isn’t particularly exciting to speculators, investors who are looking to truly make money from the stock market should unquestionably pick DexCom over Ocugen.

Similarly, you could buy an ETF like the iShares U.S. Healthcare ETF, which holds many of the top healthcare stocks you’ll find on the markets — no, Ocugen isn’t one. Investing in a broad mix of stocks through an ETF spreads out your risk, ensuring your returns won’t be dependent on how one single holding performs. That’s what makes investing in ETFs even more of a sure thing: As long as their component stocks do well over the long term, your portfolio’s value will likely increase over time.

The bottom line

Malkiel mentions in his book that some investors like to make “castles in the air” and fantasize about what a company will be in the future, and of course, pay significant premiums based on those incredibly optimistic projections. But many times, fantasy doesn’t line up with reality.

Focusing on stocks that are already profitable, with strong businesses and a clear path to growth, puts you in a great position to profit over the long term — as long as you resist the urge to gamble on other high-risk investments. And if you aren’t comfortable picking your own stocks, you can go with ETFs. Just be careful about speculating — betting big money on the short term can be incredibly dangerous and costly for your portfolio.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.