Investing in IPO; Is it a wise choice in 2021?

Did you know?

Between 2000 and 2021, there have been 5,538 IPOs. The lowest number was 62 in 2009. The number was at an all-time high in 2020, with 480 IPOs. But 2021 has already surpassed it with 843 IPOs and counting.

An investment in an initial public offering (IPO) has the potential to provide substantial returns. However, before investing, it’s essential to understand how an IPO differs from regular stock investment, as well as the added risks and laws that come with IPO investments.

In this article, you will learn;

– What is an IPO?

– History of IPOs

– What are the Types of IPO?

– What Do You Need to Know Before Investing in an IPO?

– How to Invest in an IPO?

What is Initial Public Offering? 

Initial Public Offering (IPO) is a process by which a company becomes a public company by selling its number of stocks to investors. A privately held corporation puts its stock on a stock exchange, putting it open for the public to purchase. You can become a shareholder by purchasing shares directly from the corporation.

History of IPOs

For decades, the term “initial public offering” has been a buzzword on Wall Street and among investors. By selling shares in the Dutch East India Company to the general public, the Dutch are credited with launching the first modern IPO.

Since then, IPOs have been utilized as a means for corporations to generate funds from the general public by issuing public shares.

IPOs have been recognized for uptrends and downtrends in issuance over the years. Individual industries also go through ups and downs in issuance as a result of innovation and other economic considerations. At the height of the dot-com bubble, tech IPOs exploded as firms with no revenue hurried to list on the stock exchange.

The financial crisis of 2008 resulted in the lowest number of initial public offerings (IPOs) ever. Following the financial crisis of 2008, IPOs came to a halt, and fresh listings became scarce for several years.

Much of the recent IPO hype has been on so-called unicorns—startups with private valuations of more than $1 billion. Whether these companies will go public via an IPO or remain under private ownership is a hot topic among investors and the media.

Types of IPO

Here are the two types of IPOs:

Fixed Price Offering

A fixed price initial public offering refers to the price at which some companies offer their shares for the first time. Investors are informed of the price of the stocks that the firm has decided to make public.

Investors know the share price before the company goes public with a fixed price. When applying for this IPO, the investor must pay the full share price.

For example, consider a manufacturing company that has been in operation for ten years and has decided to expand its manufacturing facilities by acquiring funds. Now, they can either raise capital through debt financing or equity financing. The corporation opts to go forward with an IPO via a fixed-price offering.

They go to their merchant banker, who assesses the company’s assets, future projects, goodwill, and promoter’s equity, on one hand, and liabilities, on the other. Following that, the company files for an IPO and receives approval.

Meanwhile, the firm and the merchant banker decide on a price for the stock after much deliberation. The stock’s face value, or actual value, is $10, whereas the price at which it will be issued to the general public is set at $50. Following that, the public can subscribe to their shares.

As an investor, you can evaluate the company’s business, the promoters’ track record and exposure, and the firm’s prospects before deciding whether or not to register for the IPO.

Book Building Offering

The firm launching an IPO provides investors with a 20% price band on the securities under book building. Interested investors submit bids on the shares before the ultimate price is established. Investors must decide on the number of shares they want to buy as well as the amount, willing to pay per share.

Unlike a fixed-price offer, there is no predetermined price per share. The floor price is the lowest price at which a stock can be purchased. The cap price, on the other hand, is the highest share price. Investor bids are used to determine the ultimate share price.

For example, If the price range for a book-built IPO is $735-$750, a strong response may result in the issue being priced at $750, while a reasonable good response may result in the issue being priced at $735.

Participating in an IPO; The Investment Bank comes first

When investing in an IPO, you need to be aware of various details, including the issue name, issue type, category, and price band, to mention a few. The issue name is the name of the company that is going public. The issue type refers to the type of initial public offering (IPO): fixed-price or book-building. Retail investors, non-institutional investors, and qualified institutional purchasers are the three types of IPO buyers.

The pricing band refers to the price range that has been established for book-building concerns. Since not all brokers make initial public offerings to their clients, IPOs are typically given to qualified or institutional investors first. As IPOs lack a track record of success, they can be riskier compared to stocks of established companies

When a company wishes to go public to offering price, it must hire an investment bank to handle the IPO. Although a firm can go public on its own, it rarely happens. An IPO can be handled by one or more investment banks.

5 things to understand for IPO Investing

What should you keep in mind if you want to invest in IPOs now that the stock price is at its peak? Let’s have a look at a few pointers.

1. Gain a thorough understanding of the company’s operations.

Before investing in an IPO stock, you should learn about the company’s business. You should select organizations that are involved in a business with significant growth potential. A high-growth corporation will be able to maintain steady profitability while also increasing revenue. You should avoid investing in IPOs of firms whose business activities you are unfamiliar with.

2. Look into the company’s history.

Examining the past success of the firm whose IPO stock you’ve shortlisted might help you grasp its business plan better. The company’s promoters should be knowledgeable and capable of propelling the company to new heights. You should stay away from organizations with an inexperienced promoter group and management.

3. Examine key financial indicators 

You can determine the company’s financial health and analyze its development potential by reviewing key financial data. Knowing the debt-to-equity ratio, for example, might help you determine the company’s degree of leverage. A high debt-to-equity ratio frequently suggests that a corporation is riskier. Before buying, you should also look at the company’s earnings per share (EPS), cash flow, return on capital employed, and other critical financial parameters.

4. Compare with the peer group

Another useful tool for evaluating an IPO is to compare it to its peer group. Assume the firm planning an IPO has a high market share and attractive financials in comparison to its peers, but the IPO’s offer price is lower. In that situation, it may present a significant possibility for profit. On the other side, if the company’s IPO pricing appears to be excessively high in comparison to its peer group, you may want to avoid investing.

5. Get a better understanding of why you’re investing.

Investing in an IPO stock for the goal of profiting from the listing may not be a bad idea, but it should not be the main reason for doing so. Listing gains are the profits you make after the stock is listed on the stock exchange. It is the difference between the issue price and the listing price. Massive losing gains are more prominent in high-profile IPOs. You should choose a firm with strong fundamentals that can deliver good long-term returns even if it does not provide listing gains.

How to Invest in an IPO?

Most of the major discount brokers have varying participation criteria, but you must have an account with one of them to invest in an IPO through that broker.

Do your homework.

Since there is no prior data or market performance history behind the firm at hand, IPO research might be intimidating. However, the Securities and Exchange Commission (SEC) requires that all companies file an S-1 form to register their offers. This form primarily contains corporate background information, financial information, and a prospectus for the offering.

Request Shares.

If you meet the eligibility requirements for an IPO, the next step is to request a certain number of shares in the offering. It’s possible that you won’t get all of the IPO shares you offered to acquire. Instead, you may be given a “pro-rata” share allocation. Consider your request to be the maximum amount of shares you’d like to purchase if they’re available.

Make a Purchase

Your broker will advise you that the offering is moving forward on the evening the IPO “prices.” A deadline will be set for you to place your order. You cannot be certain if you were able to get any shares.

If you decide to invest in an IPO, you should read the S-1 prospectus, which is a document filed with the Securities and Exchange Commission that contains specific information about the firm, including financial performance, growth prospects, and insider ownership and voting rights.

Is it a Good idea to Buy IPO Shares?

You shouldn’t invest in an IPO just because it’s getting a lot of favorable press. Extreme valuations show that the investment’s risk and reward are not favorable sometimes.

Investors should be aware that a firm issuing an IPO has no prior experience operating publicly. Furthermore, the market’s competitive landscape may have an impact on an IPO’s performance. These and other variables could stymie an IPO’s success and make an investor’s decision more difficult.

Key Takeaways: 

– The process of issuing shares of a private firm to the public in a fresh stock issuance is known as an initial public offering (IPO).

– To hold an IPO, private companies must meet the standards of exchanges and the Securities and Exchange Commission (SEC).

– IPOs allow businesses to raise money by selling shares on the New York stock exchange.

– Always read the new company’s prospectus before investing in an IPO stock.

– Investment banks are hired by companies to market, evaluate demand, determine the IPO price and date, and other tasks.

Mutual fund vs stock; A guide to choosing to making the right choice

Here is the ultimate dilemma a beginner investor faces; ‘stocks or mutual funds?’ That is, which one should a beginner investor choose to invest his/her money in.

Before we move on to answer that question (Yes, I will settle that debate once and for all), let’s look at mutual funds and stocks in detail and understand how they make money.

Mutual funds vs stocks

First off, mutual funds and stocks are interconnected. Because most mutual funds are comprised of stocks. These mutual funds that are comprised of stocks are known as equity mutual funds.

Now, let’s lay out the differences between a mutual fund and a stock.

A mutual fund pools money from investors to buy securities. The securities mostly vary between stocks and other fixed-income securities like bonds. A stock represents a portion of the underlying company. By owning a stock, you’re owning a portion of the company.

Mutual funds have Net Asset value (NAV), which is the fund’s market value per share. Which is roughly the equivalent of the share price of an individual stock.

Mutual fund investors make money when they sell the shares of the fund. And if it is a mutual fund that is focused on dividend stocks, you might receive a dividend once in a while. The same goes for stocks; you make money when you sell the stock, and when the company issues dividends.

These are just a few of the basic differences between a mutual fund and a stock. However, when it comes to deciding which investment vehicle should you choose, it all comes down to one thing and one thing only.

How much money is it going to make?

And certainly, it’s not that simple. But your objective as an investor is to grow your money. So naturally, you should choose what’s best for that.

Keeping that in mind, let’s look at the two factors that determine your profit; returns and cost. The returns are the money you make from your investment. Cost is what you should be willing to spend to achieve the expected return. Cost includes both the money you spend towards fees and commissions and the time you spend on doing the necessary due diligence.

Let’s analyze mutual funds and stocks based on these factors.

Returns; Mutual funds vs stocks

Mutual funds pool in money from investors to buy assets – mostly stock. And they aim to maximize returns for the investor. Generally, mutual funds are actively managed funds. They are run by finance professionals who are known as mutual fund managers. A fund manager decides where to invest and how much to invest.

Stocks, on the other hand, can be bought by anyone with money and a brokerage account. And they can do that either passively or actively.

One of the factors that investors associate with returns is risk. Now, the amount of risk that an investor can tolerate varies from person to person. I am fine with having my stocks go down 30%-50% at times. I can live with that. But that might not be the case for every investor.

People mostly choose mutual funds as they see them as a less risky investment. But guess what? They also generate lower returns.

Individuals tend to assume that mutual funds are the better option. Especially in terms of returns, as they are managed by finance professionals. Well, let’s take a look at these numbers;

averga return of mutual funds in the US

As you can see over the last 10 years, mutual funds have had an annual average return of 12.02%. Over the same period, S&P 500 has had an average return of 13.6%.

And there’s more.

Take a look at this data from S&P Dow Jones;

Over a 15 year period, 92% of large-cap mutual funds have failed to beat the market.

Yes, that’s right – 92%.

Don’t forget that this is despite paying the fund manager huge fees every year. This goes to say, if you choose mutual funds you’re likely to underperform the market in the long run. Mostly because mutual funds tend to be conservative about their investment choices. They care more about reducing the downside risk than growing money.

But that’s not the case with individual stocks. If you pick the right stocks for your investment strategy, you can enjoy significantly higher returns than the market average.

Take Apple, for example, a $1,000 investment made in June 2011 would be worth $11,628.19, as of June 2021. That’s a 1,062.82% gain in just 10 years.

Costs: Mutual funds vs stocks 

Costs include both the money you spend towards fees and commissions, and the time you spend on research.

Mutual funds are created by financial institutions and regulated by the Securities and Exchange Commission. And they are run by financial professionals known as fund managers. They decide which companies to invest in. By investing in a mutual fund, you’re just following suit.

Also, every mutual fund has something called an expense ratio. You can think of it as a management fee. It is the amount you need to pay as fees for investing in the mutual fund. It is represented as a portion of your mutual fund investment. For example, if you invest $10,000 in a mutual fund, and the fund has an expense ratio of 2%, you’ll pay $200 annually towards fees.

The fees must be paid no matter what. Even if the fund is underperforming the market.

Stocks, on the other hand, don’t cost you much apart from the stock price itself. Earlier, there were all kinds of fees and commissions associated with buying stocks. But with the arrival of discount brokers like TD Ameritrade and WeBull, you can buy stocks with zero commission. And unlike mutual funds, you can choose your stocks.

And even if you don’t want to buy individual stocks, there are better alternatives to mutual funds. Take an index fund for example. Index funds are passively managed funds that track and index. Which means you’ll get the same returns as that of the market index. And fees are less compared to mutual funds. You could also go for exchange-traded funds (ETFs)

Time: Mutual fund vs stock

If we talk about time spent, researching stocks can take up quite a bit of time. Especially, if you’re relatively new to investing. But despite what the mainstream media tells you, you don’t need to know everything from the oil prices to the latest trends in the market. To successfully pick individual stocks you only have to know the basics of how a company operates. Specifically, how they make money and how they spend their money.

Of course, that’s not all. You would need to learn to find information from Annual Reports, Form 10-Ks, etc. But the point is, it can be done. You don’t need to have a degree in finance to do that. Just plain old common sense is enough.

However, it is true that mutual fund investments do not take up as much time as you need with researching individual stocks. But in the long term, it’s worth it, as your returns are likely to significantly outperform the market average and the returns from mutual funds.

And we shouldn’t forget taxes. Mutual funds are not particularly great for your capital gains taxes. Capital gains tax is generally incurred when you sell your investment and make a profit. But mutual funds buy and sell stocks throughout the year. That means, even if you don’t buy or sell your mutual fund shares, you’ll still incur taxes. Even when the mutual fund is not making good returns, you might incur capital gains taxes due to the nature of the fund.

But with stocks, you’ll only incur taxes when you sell stocks and when you receive dividends. And long term investments are taxed at a lower rate than short-term investments. So if you hold on to your investments longer, you’ll make more money and you can pay less in taxes.


Both stocks and mutual funds help you in building up a diversified portfolio. But the key difference is as a mutual fund investor you’re likely to underperform the market in the long run. Mainly due to high fees, and relatively poor returns.

But if you’re not sure about how you can start with individual companies, check out our 8-step Beginners Guide. It has a list of 20 stocks that you can confidently own for the next 20 years.

Investing Internationally; How to be a global investor?

Global or international investing includes the selection of global investment instruments as part of a portfolio.

People frequently invest globally to diversify their portfolios and spread investment risk across markets.

If you are considering international investing to gain profits, this article will teach you everything you need to know.

Understanding International Investing

Investing internationally allows individuals to choose from a larger pool of investment options when building their portfolios. International investing can help diversify an investor’s portfolio by investing in assets across different economies. This can also assist alleviate some systemic risks linked with a country’s economy in particular situations.

For example, India is the fastest-growing economy in the world. And investing in the Indian markets might help investors alleviate some risks associated with the US markets.

International investing broadens the range of investment instruments available to a portfolio, beyond domestic assets. An investor might look to the same types of investment alternatives that they can find in their home country.

Global investment markets provide you with a wide range of equities, bonds, and funds to choose from.

What are the Different Types of International Investing?

Here are the types of international investing;

Direct Investments:

You can invest directly in global markets with the help of online brokerage platforms. These platforms provide access to overseas equities and are a good place to start. TD Ameritrade, Interactive Brokers, and Charles Schwab are some international brokers you can start with.

Investing in index funds/ETFs:

Exchange-traded funds (ETFs) or index funds that invest in international funds are one of the indirect ways to invest in global markets.

Investing in one or more ETFs, index funds, or equities will provide you with indirect foreign market exposure. This is the ideal option to get exposure to other markets.

Through ETFs, you can invest in a variety of markets that you believe have a future promise. Funds focused on battery technology, clean energy, or you can invest in funds that are focused on countries like India and China, for example.

With the majority of asset management firms launching foreign funds, it is easier to invest internationally today, than ever.

American Depositary Receipts: 

American Depositary Receipts (ADRs) are used to trade the equities of most non-US corporations on US exchanges (ADRs). Each ADR represents one or more foreign equity shares.

Investors who possess an ADR have the right to buy the stock it represents. An ADR’s price is equal to the stock’s price in its home market, adjusted for the ratio of ADRs to the company’s shares.

ADRs that trade in the United States can be purchased through a U.S. broker. Here are some examples of ADRs – TSM (Taiwan Semiconductor Manufacturing Co Ltd), BABA (Alibaba Group Holding Ltd), and TM (Toyota Motor Corp).

U.S.-traded foreign stocks.

Although most international equities trade through ADRs in the United States, certain foreign companies list their shares directly in the United States as well as in their home market.

Investors can purchase these international stocks that are listed in the United States and traded in the United States.

Benefits of International Investing

Let’s discuss the potential benefits of global investing;

Geographical diversification

The most obvious benefit of global investing is diversification. During market turbulence, a diverse portfolio provides a source of stability. There is a low connection between investments when they are scattered across geographies. This means that volatility in one market is unlikely to have an impact on your other investments.

Many publicly traded corporations in the United States have international revenues. For example, the S&P500 companies generate more than 40% of their revenue outside of the United States. You can construct an internationally diversified portfolio just by investing in US stocks.

New Opportunities

Global investing allows you to take advantage of financial opportunities that aren’t available in your home country.

You can even go with a theme or a mix of different areas. For example, you might like the manufacturing market in China which you can combine with a different market in Europe.

What Should You Consider Before International Investing? 

Before you consider international investing, here are the things you must consider;


Gains earned in a foreign country may be subject to taxation in that country. In that country, you may be compelled to file a tax return. There may be tax credits available, but there is also a slew of additional levies to be aware of before diving in.

Make sure your brokerage supplies you with the necessary paperwork and tools when it comes to filing your taxes.


It is now pricey to open a brokerage account that allows you direct access to overseas markets. Be aware of your per transaction charges, any minimum investment, and other factors as you begin this trip.

This would ensure you’re taking into account all the expenses associated with investing in a foreign market.

Impact of Foreign Exchange

The fluctuation in the exchange rate is an important element to consider while investing in foreign markets. When you invest in Indian markets, you’re also investing in the Indian Rupee, and you’re taking on the risk that comes with it. When the value of the Indian Rupee rises, so does the value of your portfolio, and vice versa.

Watch Out for These Risks

Access to various types of information

Many corporations outside the United States do not give the same level of information to investors as public companies in the United States, and the information may not be available in English.

Expenses associated with international ventures

Investing in international companies can be more expensive than investing in American companies.

Collaborating with a broker

If you are dealing with a broker or investment adviser, you should check to see if the investment professional is registered with the Securities and Exchange Commission (SEC) or the proper state regulating organization (for some investment advisers).

Currency exchange rate fluctuations and currency controls:

When the exchange rate between the US dollar and the currency of a foreign investment fluctuates, your investment return can grow or decrease.

Furthermore, certain countries may apply foreign currency restrictions, which prohibit or delay the movement of currency out of a country by investors or the company in which they have invested.

Political, economic, and social events

You may find it challenging to comprehend all of the political, economic, and social elements that drive markets.

Different levels of liquidity

Markets outside of the United States may have lower trading volumes and fewer listed firms than markets within the United States. They may be only open for a few hours each day.

Legal Remedies: 

If you have a problem with your investment, you may not be allowed to pursue certain legal remedies as private plaintiffs in US courts. You may not be able to collect on a US judgment against a non-US firm, even if you sue successfully in a US court. If any legal remedies are available in the company’s native nation, you may have to rely on them.

Bottom Line 

Since the turn of the century, international investments have grown in popularity. While these investments give you more alternatives, they also come with some risks.

Many investors in established economies invest in developing economies to increase their chances of making a profit. Some investments are made into managed funds, exchange-traded funds, and other similar vehicles with the goal of diversification and modest returns.

International investments not only help to improve foreign economies and bring in more money, but they also help to increase market trust and corporate credibility.

Key Takeaways

– Holding securities issued by corporations or governments in countries other than your own is referred to as an international investment.

– Portfolios can become more diversified by investing worldwide, which can improve returns and minimize portfolio risk.

– International markets, both developed and emerging, involve various levels of risk and possible reward.

How to know when to sell a stock; 3 reasons to sell

Congratulations, you’ve made it!

The fact that you’re currently reading this indicates that you chose to invest – which in itself is an achievement.

And now that you own stocks, you want to know when to sell the stocks for maximum profit.

Let’s take a look.

Stock selling 101

Warren Buffett, the legendary investor once said – “Our favorite holding period is forever”. Some might make the case that it’s not technically true. Because selling stock is the only way you can realize all of your capital gains. And you’re right. However, what Buffett means to say is not that you should never sell your stock. But more like, you should hold on as long as possible.


Because it has been proven that the stock market appreciates in the long run – the more time you stay invested the more valuable the investments will be.

But there’s a catch here.

The market is rising in value does not mean that all the companies are doing good – more importantly, it does not mean that all companies will rise in value in the long run. Some might just stay the same, where some decrease in value.

The point is, you should know when to sell and when not to sell.

The 3 reasons to sell

Sell the stock if there is no more room for growth

You should ideally sell the stock if the company can’t grow anymore. This would be where the company has reached a saturation point, from which there isn’t room for significant growth. And no significant growth equals no significant earnings and as a result, investors wouldn’t want to pay more for the stock.

To understand whether or not a company can grow more, there are some metrics that you can look at. Market capitalization is one of the most common metrics investors use to identify a stock’s potential for growth. Small-cap companies have a lot of room for growth, whereas a trillion-dollar company can’t grow much. The reason is simple – once you have your revenue in the hundreds of billions of dollars, it’s hard to make money on top of that. For example, Apple – the most valuable company in the world by market cap, had a revenue of $274.52 billion in the financial year 2020.

However, you should not sell off all the large-cap companies, especially not the ones that pay a good dividend– if there isn’t much capital appreciation, the dividend yield should be at least 5-6%. It’s better to trim your position, selling off portions at a time.

Sell the stock when the fundamentals change

When strong fundamentals are the reason you bought the stock in the first place, shouldn’t you sell the stock when the fundamentals change? That raises another question – how do you know whether or not the fundamentals have changed? To find the answer to this question, let’s take a step back and look at what constitutes a company’s fundamentals.

Fundamentals of a company typically include their financial and corporate performance, business model, moat, management, market share, etc. These are pillars on which the whole business is built. So in the event, one of these pillars changes, or in the worst case – ceases to exist, it’d be good to take a second look.

For instance, in the case of airlines, the global pandemic led to a major change in the core of the business – because people stopped flying. Now, some might argue that this is just temporary, and once the restrictions are lifted, everything will be back to normal. But, is that really the case?

Airlines are an industry where even the slightest disruption can cause major problems. Even if the entire population is vaccinated – an event for which we don’t have a timeline, would people go back to traveling the way they used to? Also, business travel is the major source of income for airlines, and that to an extent has been replaced by Zoom.

Keep in mind that not every fundamental change is bad for the company. Some changes can steer the course for the better in companies that are on a downward spiral. This means to say that just because something has changed does not mean you should sell the stock and invest the money elsewhere. More like, take a step back and see how this particular change in the fundamentals might affect the company in the next 5 years. If you feel it’s not the same company that you bought initially and you don’t have faith in the company anymore, it might be a good time to sell.

Sell the stock when you achieve your goal

Every investing plan should have a goal, along with a sound strategy that takes into account your time horizon, risk tolerance, etc. The goal can be anything you want to achieve – retirement, long-term wealth, etc. The more flexible you are with when you want to achieve the goals – the better.

And once you achieve that goal – whatever the goal may be, it might be a good time to sell. Because, at the end of the day, you need to sell your investments to realize the gains. And if you have been reinvesting your dividends, probably you never cashed out – and it might be time for that. You shouldn’t sell when the market is in a downturn, but at the same time, you shouldn’t wait for the market to hit an all-time high. Because in the short term, the market is rarely predictable.

When NOT to sell a stock

Now that you have seen the various instances at which you sell your stock, let’s look at the opposite scenario – when not to sell a stock.  And this is perhaps more important than knowing when to sell. In a nutshell, you should never sell your stock for any other reasons than those mentioned above.

For most investors, the number one reason to sell a stock is a price drop. And it is also the number one reason why many investors underperform the market and lose out on the potential market winner. Whenever investors see a dip in the price of the stock they own, investors immediately sell the stock, glad that they managed to mitigate the loss because of their immediate action.

Thanks to those investors, nowadays all it takes is slightly awkward news to get the investors spun into action, sell the stocks and drive the price down. The best example of this is when Zion Williamson’s Nike basketball shoes exploded on national TV. Nike shares fell the next day – they were down 9 percent.

Understand that anything and everything can affect the stock price in the short term – it moves up, down, and sideways. And it’s okay, it’s not a reason to sell the stock. If you look closely, you will find that most of the time, it’s just random market movement – meaning there might not be a specific reason why the stock went down. Sometimes, it seems like it dropped on its own. The point is  – don’t sell your potential ten-bagger because it dropped some percent.

Unfortunately, it’s easier said than done. When you are losing money because your stocks are going down, it can be hard not to sell. Emotions are part of human nature and greed and fear may lead to illogical decisions. This is why keeping your emotions in check is important. Whenever you’re faced with a decision to sell or hold the stock, ask yourself – is it emotion or logic that is driving this decision? The human tendency to trust the ‘gut feeling’ or ‘instinct’ might not work in the stock market. Any decision based on gut feelings and instincts likely won’t go well.

A couple of things to keep in mind to avoid such scenarios; do your homework before buying a stock, have an investment strategy in place, and understand that by selling now, you might be missing out on a stock that could potentially take your portfolio through the roof.

The rule of selling

Every investor should understand and accept these facts when investing in the stock market.

You’ll always have some losing stocks

It does not matter how hard you try and how deep you look, you won’t be right all the time. You might have been right about the company’s prospects, but unfortunately, an unforeseen event is all it takes to change everything about a company – but that’s fine. All it takes is a few great stocks in your lifetime to create generational wealth. The 80-20 rule applies to investing as well; 80 percent of your returns will come from 20 percent of your stocks.

It might take a long time

As an investor, you must accept the fact that companies might take years to generate significant returns for the shareholders. The stock can keep going sideways for a long time. There might be several factors that restrain the company from this, it can range anywhere from having a dominant competitor who holds a major portion of market share, to degrowth of the sector. You’ll lose far more money selling too early than you will by buying bad companies.

Take Microsoft for example, from 2002 to 2013, the stock produced returns of merely 13 %. However, from 2013 to 2021 the stock rose a whopping 600%.

Due diligence is a must

If you don’t do due diligence on a particular stock, it’s not an investment, it’s a gamble. And when you gamble with stocks, you might be forced to sell too early or hold on till it’s too late. Hence, you must study the company and its fundamental components before investing in it.

Bottom line

When you buy a stock, you should be prepared to hold it forever. That’s the mentality that gives you substantial returns in the stock market. The next time you think of selling a stock because the stock is down 10 percent, think of the guy who sold his Amazon shares after the dot-com bubble. So make wise investment decisions that are based on logic and facts, not emotions and hype, and sell only when the situation calls for it. Remember, investing is not an exact science, it’s an art.

And if you don’t have a repeatable investing process to help you manage your portfolio in arguably the most uncertain market environment in history, check out our guide on Bear Market Investing Strategies.

Contrarian investors: A guide to betting against the market

“When everybody thinks alike, everybody is likely to be wrong.”

– Humphrey B. Neill, The Art of Contrary Thinking (1954)

In life and the markets, many like to go with the crowd. People buy the same car that others buy, get the same phone others get, and in the stock market, they invest in the same equities others invest – never bothering to check whether it’s good for them.

You might ask – ‘what’s wrong with that?’

Well, before I tell you, first let’s take a look at what contrarian investing is.

What is contrarian investing?

Contrarian investing is an investment approach, where investors not only stop following the crowd, they move against it. That means selling when others are buying and buying or holding on when others are selling. Contrarians purposefully act against the majority opinion, by making investment decisions that oppose the prevailing market trends.

The core belief behind contrarian investing is that market direction is subject to herd mentality, resulting in markets being periodically under and over-priced. A contrarian investor believes that investors as a group tend to get over-optimistic with certain stocks, driving their price up to a point where the price can no longer be justified with the stock’s fundamentals.

A contrarian investor makes the most of these mispricing in the securities markets.

How does contrarian investing work?

Contrarian strategy involves identifying the prevailing market sentiments and going against them. Just to be clear, this does not mean going against the market, all the time. Rather, it’s about identifying and assessing the existing market conditions and when market sentiments seem to lean heavily in one direction, take the opposite side.

For instance, in the late 90s, investors were too excited about internet companies and bought every stock that had anything to do with the internet. This resulted in tech stocks going up more than 1000% in value. And all of it ended with the dot-com crash in the early 2000s. Those who moved with the crowd nearly lost all of their investments.

These are some of the characteristics of a contrarian investor.

Buy undervalued stocks

A major part of contrarian investing involves buying stocks that are trading below their intrinsic value. When a contrarian investor sees that the market has over-priced certain stocks, they look for the undervalued stocks. Bear in mind that some stocks are overpriced because investors, too optimistic, sold off certain other stocks to find the money to invest in these stocks – which are now overpriced. Once contrarians buy the undervalued stocks, they wait for the broader market sentiment to change and undervalued stocks will return to their fair value, generating profits for the contrarians.

Move against market sentiment

A contrarian investor also understands the importance of the behavioral biases of investors. For example, studies in behavioral science indicate that investors tend to overestimate the recent trend while predicting the future; the poor performing stock will continue to perform poorly, and a strongly performing stock will remain strong.

In fact, David Dreman, a contrarian investor and author of Contrarian Investment Strategies: The Next Generation, has often mentioned that we humans tend to be both overly optimistic and overly confident. Contrarians also understand that exaggerated optimism and pessimism can drive prices to extremes.

So the broad investor sentiment pushes the price of certain stocks well below their intrinsic value. That presents an opportunity for contrarian investors to grab those which are now trading below their intrinsic value.

Invest in a bear market

Another trait of contrarian investing is they are ready to invest in a bear market. Even though it is a lucrative idea for all investors – to buy stocks at a discount during a market downturn – very few investors actually pull it off. Most investors pass through a downturn or correction selling stocks but never buying any. Because let’s face it – it is extremely hard to put your money in the stock market when ‘doom and gloom’ surround you.

Contrarian investors, however, are ready to buy -especially- when the market is on a downturn. Bear or bull market, they’ll gladly enter into long positions in companies with strong financial fundamentals. This brings us to the next trait of a contrarian.

Have a long term outlook

Another reason a contrarian investor might gladly invest in a bear market is their long-term outlook. A contrarian investor understands that market volatility and extreme price swings are close to negligible when you invest for the long term. Because it has been proven that the market appreciates over time. This helps contrarians in riding out the market downturns. And once they do that successfully, substantial returns await them.

Also, since contrarian investors primarily invest in undervalued stocks, it might years for investor sentiment to change in favor of these stocks. That is another reason contrarians have a long-term outlook.

Look for strong financials

Contrarian investing also advocates for companies that have strong financial fundamentals. A contrarian investor understands that companies can have poor stock performance even with strong financials. They believe the broader market sentiment can have a blurring effect on investor’s outlook on non-favorite stocks, persuading investors to neglect their strong fundamentals.

So they focus on a stock’s intrinsic value – assessing the company’s financial and business fundamentals, which gives them a clearer picture of the company’s future. Also, by buying undervalued stocks they improve their chances of making a profit, simply by waiting for the stock price to return to its intrinsic value.

The investment strategy that focuses on the intrinsic value of a stock is known as value investing.

Contrarian and Value investing

Value investing is one of the most followed and widely respected strategies for stock picking. A value investor aims to buy stocks that are trading below their intrinsic value. And it is quite similar to contrarian investing. Both aim to buy undervalued stocks to make a profit when it returns to its fair book value, both have a long-term outlook, and perhaps more importantly, both follow the principles of going against the crowd.

Both contrarian and value investors understand that people tend to overreact to good and bad news and hence the short-term price movements do not mean anything in the long term.

In fact, there’s so much similarity between value and contrarian investing that some consider value investing as an example of contrarian investing. And many legendary value investors are also considered contrarian investors.

These are some of the most famous contrarian investors.

Warren Buffett

That’s right – the most famous and arguably the most successful investor in the world is a contrarian. Warren Buffett never cared about what the media or analysts were thinking about the market or a particular stock. If he ‘felt’ a certain stock was a good investment, he would gladly invest a huge chunk of money, or sometimes, buy the whole company.

In 2008, for instance, at the peak of the financial crisis, when investors were losing their heads and their money amidst a wave of bankruptcy filings, Buffett told investors to buy American companies. He wrote on New York Times, and I quote –

I’ve been buying American stocks. This is my personal account I’m talking about….If prices keep looking attractive, my non-Berkshire net worth will soon be 100 percent in United States equities.

Why? A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful”.

Was he proven right? You bet he did. 10 years later, S&P 500 was up 130%.

Bill Ackman

He is an American billionaire investor and hedge fund manager, who is also the founder of Pershing Square Capital. He is also famous for using his equity stake in a company to put pressure on its management. Ackman has said that most of his successful investments have always been controversial, and his first rule of investing is to “make a call that nobody believes in”.

He twice reinvested heavily in beaten-down Valeant Pharmaceuticals against prevailing market sentiments.

Michael Burry

Michael Burry is the man behind The Big Short (2015). In 2005, Burry bet against the riskiest parts of the subprime mortgage market and profited from them, when the housing market collapsed. Meanwhile, Burry and his hedge fund Scion Capital ended up producing nearly 500% returns for investors who stayed with him.

David Dreman

Dreman is the author of a number on contrarian investing including Contrarian Investment Strategy: The Psychology of Stock Market Success, and Contrarian Investment Strategies: The Next Generation.

Value investing is a contrarian approach you can start with. To kickstart your contrarian investing journey, check out our The 8-Step Beginner’s Guide to Value Investing.

Value investing strategy | Become a value investor

“Price is what you pay, value is what you get”

These are the words of Warren Buffett, CEO of Berkshire Hathaway, also one of the world’s richest men, and more importantly, one of the most successful value investors in the world.

As Berkshire Hathaway’s most recent annual shareholder letter shows, between 1965 and 2020, Berkshire Hathaway’s average annual gain was 20%, which was nearly double the 10.2% average annual total return (i.e., including dividends) of the benchmark S&P 500 over the same period. Over this time span, Berkshire Hathaway’s stock has nearly outperformed the S&P 500 by an aggregate of 2,800,000%, courtesy of Warren Buffett – the value investor.

What is value investing?

Now that we know how successful value investing can be, let’s look at what exactly value investing is.

Value investing is an investment approach where investors look at the intrinsic value of the stock rather than the share price, to determine potential investments. The intrinsic value or true value of the company is determined by using various metrics that include the financials; revenue, earnings, cash flow and profits, and business fundamentals; brand, business model, competitive advantage, and target market.

A value stock is a stock that trades for less than its intrinsic value, and value investing, as a whole, is about finding those value stocks and investing in them for good long-term returns.

How value investing works?

It’s quite simple – imagine you are buying a car. Whether you buy the car at full price or at a discount during a sale, does not make any difference to the car – the car will have the same features and performance. However, if you buy it on sale, you will save a lot of money, than if you buy at full price.

The same goes with stocks; if you understand the true value of a stock, you can save a lot of money when you buy it at a discount. And in the stock market, stock price movements occur, but that does not change the value of the company. Just like the car going through periods of increased demand often resulting in a higher price, does not change what you’re getting for your money.

Value investing uses the same principle; investors learn the intrinsic value of a stock, and see if it is overpriced or undervalued, and accordingly, they wait for market fluctuations for a discount. When the stock price is well below its intrinsic value, they buy the stock, thereby saving money, and increasing the potential returns.

How is value investing different from other methods of investing?

There are a lot of differences between value investing and other investing methods, the primary one would be how investors approach a stock. Value investors are more concerned with the underlying company and its business fundamentals; earnings, cash flow, etc. rather than the current stock price or the factors that affect the price. Because value investing is based on the belief that stock prices are the perceived value of stocks that mostly depends on supply and demand from investors, and often, not an accurate reflection of the value of the underlying company. They also believe that the market reacts to each and every news about a stock, hence most stocks are either overvalued or undervalued.

Value investing also has a long-term outlook. Value investors are buy-and-hold investors who are with the company for the long term. Unlike other investors who might sell their shares within a year or two, value investors believe in the long-term capital gains and are willing to hold on to their investments, as long as possible.

Comparing with growth investing, which is more about finding stocks that produced more than average returns in the past, value investing is more about the future of the stocks. Growth stocks are generally overpriced, whereas value investors look for undervalued stocks at a discount.

Who are some successful value investors?

Warren Buffett

Even if you’ve been living under a rock, chances are you have heard about the Oracle of Omaha. Warren Buffett is the most famous and arguably the most successful value investor ever. He is currently worth $97.3 billion (as of 16 March 2021). He is the chairman and the largest shareholder of Berkshire Hathaway (30.71% of the aggregate voting power and 16.45% of the economic interest), which owns more than 60 companies, including insurer Geico, battery maker Duracell and restaurant chain Dairy Queen. Berkshire Hathaway also owns significant portions of Apple (5.4%) and Coca-Cola (6.2%).

Benjamin Graham

He might not be as famous as Warren Buffet, but we can’t talk about value investing without talking about Ben Graham. He is known as the ‘father of value investing’. He wrote the book The Intelligent Investor which according to Warren Buffett is ‘the best book about investing ever written’. He was Buffett’s mentor and one of the most influential figures in Buffett’s success.

Peter Lynch

peter lynch on a chair

Peter Lynch is a mutual fund manager and a value investor. Peter Lynch was the manager of Magellan Fund at Fidelity Investments. Between 1977 and 1990, Lynch averaged a 29.2% annual return, consistently more than double the S&P 500 stock market index and making it the best-performing mutual fund in the world. During his 13-year tenure, assets under management increased from $18 million to $14 billion. He is the author of One up on Wall Street.

What are the principles of value investing?

Value investing follows a set of principles that makes it different from other investing strategies.

Intrinsic value

As per value investing strategies, stocks are either undervalued or overpriced, that more often than not, a stock price does not reflect the intrinsic value of the stock. One of the most important principles of value investing is understanding the intrinsic value of a stock. Value investors use fundamental analysis where an investor studies various metrics to determine the intrinsic value of the stock. The metrics include financials; revenue, earnings, and cash flow and fundamentals; company brand, market share, competitive advantage.

Margin of safety

Even though value investors are looking for undervalued stocks, they consider the possibility of an error in the valuation of the stock. Hence, they leave some room for error i.e margin of safety. This is an important value strategy. It is based upon the fact, you have a better chance of earning a profit if you buy a stock at a discounted price, rather than the full price.

For example, consider a stock that is worth $100, but currently trades for $80. If you buy that stock at $60, you will have a profit of $40 just by waiting for the stock to reach its actual value. Moreover, if the company grows and the stock price goes up to $120, you’ll have a profit of $60. However, if you had bought the stock at $100, you would only have $20 as profit. The margin of safety is to ensure that, even if your valuations are incorrect, the chances of losing money are less, since you bought the stock at a lower price.

Markets are not efficient

Value investors believe that the stock market does not take all aspects into account and that the stock price is not an accurate representation of the value of the company, it may either be overpriced or undervalued. Value investors understand that the price of a stock depends on various factors other than the underlying company’s fundamentals, which include supply and demand from investors and traders in the market, who might be under the influence of short-term news and events.

For example, investors might be hyped about an upcoming technology so they are buying a lot of shares that might skyrocket the stock price. Or they might be worried about the change in the state administration, which they believe would affect the economy, and investors sell shares that decrease stock prices.

Long term gains

Another important principle of value investing is the long-term outlook. Value investors are buy-and-hold investors who are looking to hold the investments for at least 5-10 years. There is no instant gratification when it comes to value investing. Value investors are willing to hold on to their investments through the downturns and market corrections, because they believe that, in the long run, the market will rise in value, and they will be rewarded with exponential capital gains. To quote Warren Buffet – “our favorite holding period is forever”.

What are the strategies for Value investing?

While value investing has evolved through the years, these investment strategies remain at the heart of value investing.

Avoid herd mentality

Value investors don’t go with the crowd. In fact, value investing advocates quite the opposite. So value investors mostly buy or hold when everyone is selling and sell or stand back when everyone is buying. The reason being, value investors understand that short-term fluctuations don’t necessarily affect the long-term earnings of a stock. But whereas other investors often act based on the latest news on the stock, which most likely won’t have an effect in the long term.

Also, value investors do not buy the ‘hot’ stocks. They understand that if it is ‘hot’ it is already overpriced. Instead, they look for quality companies whose products they’ve personally used, or companies they are quite familiar with. If those stocks are overpriced, they’ll buy it during one of the market fluctuations, while making sure that the fundamentals are strong and it has great potential for growth.

Analyze fundamentals

Value investing is all about the intrinsic value of a stock. To find the value, investors analyze the fundamentals of the stock. It includes going through the financial and corporate performance of the underlying company. Value investors will look at the financials, and business fundamentals.


Studying the financial statements of the company is a great way to understand the intrinsic value of the stock. Income statements, balance sheets, and earnings statements contain all the information you need to know about the current financial position of the company. These are some of the metrics value investors look at:

  1. Price-to-earnings (P/E) ratio is the ratio of the company’s share price to its earnings per share (EPS). For example, if a company trades at $50 per share, and EPS is $5, then its P/E ratio is 10. Value investors generally look for companies with P/E ratios in the bottom 10% of their sector.
  2. Price-to-book (P/B) ratio is the ratio of a company’s share price to its book value – which is the total value of all assets of the company. Typically, a ratio less than one is ideal. Because if the stock price is lower than the book value of the company, the stock might be undervalued.
  3. Free cash flow is the cash left after paying for all the expenses including operating expenses and capital expenditures – which are used to purchase, maintain, or upgrade physical assets. If a company is generating free cash flow, it means the company has plenty of cash to invest in future business, pay off debts, or pay dividends to shareholders.

Business fundamentals

Value investing also advocates looking at fundamentals of company business such as; the industry the company is in – whether it is an established industry or a growing industry with huge potential; the business model – do they have multiple sources of revenue, or do they have recurring revenue; competitive advantage – what makes them different from their peers, do they have intangible assets that make them unique; management; does the management has an impressive track record, etc.

Looking at these aspects of the company will give you more insight into the potential gains of the stock. For example, if the company has patents for the latest technology, that is a major advantage, which you won’t find in the financials of the stock.

Looking for unglamorous stocks

Like I mentioned before, value investors do not go with crowds – they go the other way. For that reason, value investors also look at industries that might not be ‘hot’. They look at unglamorous stocks because the objective is to find undervalued stocks with potential, regardless of the industry. These stocks might not be very popular among investors, as media and analysts rarely cover such stocks. Waste Management (WM) is an example of an unglamorous stock.

Insider buying and selling

Insiders are the company’s directors and senior executives who have significant knowledge about the future of the company, more than any analysts or media. If they’re buying stocks of their company with their own money, it is often considered a good sign, as it shows that they have good faith in the future of the company. Alternatively, if they’re selling their holdings, that doesn’t necessarily mean the company is going down – it might be a case of the shareholder needing some money. However, if there are mass selloffs, it might be good to take a second look at the fundamentals of the company.

Ignoring the analysts and media

Another strategy used by value investors is not paying attention to what media and analysts say. The media seems to prefer bad news, as it appeals to the audience more than good news. So they often inflate small issues to a potential market crash. Value investors believe that this hype news won’t have any long-term consequences, and making decisions based on such news, often result in a loss of money.

Value investors also understand that analysts don’t have a great reputation when it comes to predicting the future. While they may use analysts’ estimations from time to time to measure the performance, they don’t make any investment decisions based on analysts’ opinions.

How to start with value investing?

Value investing requires time and effort. Finding value stocks from the thousands of stocks listed in the market is not easy. Here are some ways you can start;

Use a stock screener

Stock screeners use various criteria to find certain stocks. The screener filters all the listed stocks, to find specific stocks according to the set criteria. It allows you to limit your research to stocks that meet your unique parameters. Generally, to find value stocks investors use parameters such as P/E ratio, P/B ratio, EPS growth. Once they narrow their search down to a couple of undervalued stocks, they start their due diligence on each one.

Some of the best screeners include Yahoo! Finance, StockFetcher, Chart Mill, Zacks, Stock Rover, Google Finance, and FinViz.

Read annual and quarterly reports

One of the best ways to understand the business of a company is by reading the quarterly or annual report. All the companies listed on the stock market are required to submit quarterly and annual reports that have all the information regarding the happening surrounding the company in the specific reporting period – a quarter or a year. These reports will include all the facts – the financial and corporate performance, the risk and threats, lawsuits faced by the company – everything you need to know.

This would be the most credible and authentic information available about a company in the stock market. Annual reports are generally preferred over quarterly reports, as sometimes companies face fluctuations in their revenue during certain periods in the year.

Focus on long term growth

This is a value investing strategy that is applicable to most investment methods. With value investing, it is all about the long-term perspective. It’s important to keep that in mind at all times. Educate yourselves on how the market works, and what is important and what is not. This will help you in riding through the short-term fluctuations and keep your focus on the long term. As the old saying goes, ‘time in the market beats timing the market’, if you take actions based on the volatile nature of the market, you’ll most likely lose out on capital gains in the long term. When you choose value investing, be ready to hold the stocks for at least 5-10 years.

Emotions play a significant role in the value investing strategy. Keeping your emotions in check is key in sailing through the short downturns in the market. Read how you can effectively manage your emotions.

Learn, invest and repeat

As I have mentioned, value investing involves a lot of research and this is just enough to get started. One of the best ways to learn more about value investing is to read books such as The Intelligent Investor by Benjamin Graham, or One up on Wall Street by Peter Lynch. Also, we have launched a mentorship program to help value investors find undervalued stocks and guide investors through their investing journey. Our program Capital Gains Multiplier (CGM) is closed for entry as of now, as the spots have been filled. However, you can join our email list to get notified when it is open again.

Also, if you would like an easy guide to value investing check out our Amazon bestseller The Beginners guide to Value investing.

What is penny stock; Should you buy it in 2021?

What is a penny stock?

If you’ve ever watched the movie ‘The Wolf of Wall Street’ you might be familiar with penny stocks. ‘Pink sheets’ and ‘penny stocks’ were how Jordan Belfort notoriously made millions. Don’t get me wrong, he never bought any penny stocks. All he did was sell penny stocks, that were worth nothing, to investors for huge prices and make money through commissions. Let’s start with what penny stocks are.

Penny stocks are stocks that trade for, if not a penny, a small amount. Generally, they are considered as any stock that trades under $1 a share. However, according to the Securities and Exchange Commission (SEC), penny stocks are stocks that trade under $5 per share. While some penny stocks are traded on stock exchanges like NYSE (New York Stock Exchange), penny stocks are more often traded on the over-the-counter (OTC) markets. Generally, penny stocks are shares of smaller and relatively new companies. Penny stocks are less liquid in nature, which means they are not bought and sold frequently. OTC markets group that frequently trade penny stocks include OTCQX, OTCQB, and OTC Pink.

What is the difference between a penny stock and a small-cap stock?

To understand the difference between a penny stock and a small-cap stock, let’s look at how they are defined. While a penny stock is defined on the basis of its share price, a small-cap stock is defined on the basis of its market capitalization (used to represent the value of the company). Smallcap stocks are companies with a market cap between $250 million and $2 billion.

Both penny stocks and small caps have small market caps, however, penny stocks are mostly traded on over-the-counter markets such as OTC Bulletin Board, whereas small-cap stocks are traded on major market exchanges like NYSE and NASDAQ. Even though there are stocks trading on NYSE and NASDAQ with share prices lower than $5, they aren’t generally considered penny stocks.

Why should you stay away from penny stocks?

Penny stocks attract a lot of investors mainly because they are cheap. A lower share price means investors can buy a lot of shares for less money. Investors, especially novice investors look at penny stocks as means to make a lot of money with a small initial investment. However, most fail to understand the risks associated with investing in a penny stock company. Let’s look at some reasons why investors shouldn’t buy penny stocks.

Low liquidity

The liquidity of an asset or an item is the ease by which an item can be converted into cash. The more liquid an asset is, the more easily it can be converted into ready cash.

Stock shares of large companies have high liquidity, meaning you can buy and sell them easily, at any time. However, penny stocks have very low liquidity. Primarily because they are traded infrequently, and the trading volumes are low. Once you acquire some penny stocks, you might not be able to sell them at your price or time, due to the low liquidity. You might have to lower your ask price until a buyer is interested in buying at that price. More often that leads to huge losses if you’re selling off large positions. This is even worse when the price is low. It’s highly likely that you will end with a whole junk of worthless stocks. Low liquidity will also result in a high bid-ask spread (the difference between the prices quoted for an immediate sale and an immediate purchase), which will result in a higher transaction cost.

Lack of information

Company valuation is a major part of investing. An investor can make better decisions through due diligence when they have the financial and corporate performance reports on companies, readily available. However, this is not always the case with penny stocks.

Since penny stocks are traded on OTC markets, very little information is available about the penny stock companies. Because, unlike a stock exchange, there aren’t many regulations for a company in the OTC markets. So, OTC penny stocks are not obliged to make their financials and other information regarding the company available to the public. And as most of these companies are new and obscure, it can be very difficult to find reliable information on them. A company might be facing bankruptcy, and you might not know. When there isn’t information available on the companies, the share price becomes speculative, which exposes investors to a lot of scams.

Scams and frauds

The stock market is no stranger to scams and frauds. Over the years, the market has had its share of scams. Investors lost millions over the years through various scams involving shell companies, accounting frauds, Ponzi schemes, and penny stocks.

That’s right! Penny stocks are infamous for scams and frauds. The primary reason fraudsters love penny stocks is their lack of transparency. As I have mentioned before, listing requirements on OTC markets, where penny stocks are traded, are minimum or more often, none. That makes it easier for scammers to manipulate investors, especially inexperienced penny stock investors. One of the most common schemes is the ‘pump and dump’ strategy. Scammers will buy thousands of shares of a rather unknown stock, and they create hype around the stock with false and misleading information to attract investors. You might have come across emails with titles like “HOT PENNY STOCK TO BUY NOW!!!” or “YOU MISSED THE 1000x UPSIDE”, which are mostly these scammers. Once they manage to convince the investors that these are stocks with high ‘potential’, investors will start buying the stocks, resulting in an increase in the stock price. Once the price is high, the scammers will sell off all their shares, earning huge profits, resulting in the steep decline of the stock price. By the time investors realize the truth, scammers would have made a whole lot of money, and investors would be left holding a whole lot of worthless stocks.

Penny stock scams usually involve shell companies, which are legally incorporated but do not have any business operations or assets. De Maison’s scam was a classic pump and dump scheme involving shell companies.

High volatility and risk

The stock market is volatile in nature. The stock prices will move constantly in upward and downward directions in the short term. In the long run, the market generally seems to move in an upward direction.

When it comes to penny stocks, the primary reason most investors choose them as an investment option is the potential upside in the stock price. For example, a penny stock trading at $.0001, and if somebody buys 100 million shares ($10k) and the stock goes up to .0010 they’ll have $100k in profits. It doesn’t always work like that. If it is the other way around, say the stock trades at $.0010 and somebody invests $10k (10 million shares), and the price goes down to $.0001, their investment will only be worth $1000.

Although the risk is inherent with any stock, this highly volatile nature of penny stocks increases the risk exponentially. In fact, the SEC warns investors that if they invest in penny stocks, they “should be prepared for the possibility that they may lose their whole investment”. Also, following the Exchange Act rules of §240.15g-2, the brokers must provide the customer with a standardized disclosure document when an investor wants to buy penny stocks. This document explains the risks associated with buying penny stocks, customer rights, and remedies in cases of fraud.

What should you choose instead of penny stocks?

Investing in penny stocks involves significant risk, exposure to scams, and most importantly, loss of money. Day traders try to capitalize on penny stocks, and they fail more often than not. In fact, only 3.5% to 4.5% of day traders are successful in producing consistent profits for at least several years. For long-term investors, it’s better to stay away from penny stocks, as it can affect your capital gains significantly.

Alternatively, there are other investment options you can choose from. That includes low-cost index funds, etc.

Low-cost index funds

Index funds are passively managed funds that track an index. These funds buy shares of all the companies on the index that it tracks, in order to try and mirror the performance of the index. Unlike actively managed funds, where professionals manage the holdings of the fund, index funds are automated to follow shifts in the value of the underlying index.

This passive nature of index funds results in a lower expense ratio, which typically ranges from 0.02% – 0.09%. Fidelity Zero Large Cap Index (FNILX) would be an ideal option as an index fund, since its expense ratio is 0.0%, meaning you don’t need to pay anything to invest in this fund. Index funds can be a great investment option especially if you are a first-time stock buyer. Additionally, most index funds don’t have a minimum initial investment, so you can start with as little as the share price.

Actually, you can invest with less than that, by buying fractional shares.

Buying fractional shares

A fractional share is a portion of an equity and is less than one full share. Many of the major brokerage firms including Charles Schwab, InteractiveBrokers, Fidelity, SoFi, offer the option of buying fractional shares (TD Ameritrade doesn’t offer fractional share purchases, but it does not matter anymore as the broker has now been acquired by Charles Schwab). This allows you to buy stocks with as little as $5 or $10 dollars. This can be done without paying commissions. Besides, you can get your hands on more expensive stocks like Amazon using fractional shares.

Frequently asked Questions

What defines a penny stock?

According to the Securities and Exchange Commission (SEC), penny stocks are stocks that trade under $5 per share. However, penny stocks are generally considered stocks that trade under $1 per share.

Are Penny Stocks dangerous?

Yes, penny stocks can be dangerous for an investor, as they pose a risk of losing all of their money including the principal amount. Even though a certain amount of risk is inherent with any stock, penny stocks possess a significant amount of risk due to their high volatility.

Can you make money in penny stocks?

Buying (investing and trading) penny stocks is more like gambling. Sure, you could win some. But in the long run, you are most likely to lose all your money. If you want consistently build your wealth, it’s better to stay away from penny stocks and focus on value investing.

Has anyone become rich from penny stocks?

Not really. Many investors became millionaires from owning regular stocks, not penny stocks. Warren Buffet, the legendary investor, focused on value investing where he invested in regular stocks and became one of the world’s richest men.

If you would like to get started with value investing, check out our Amazon-bestseller The 8-Step Beginner’s Guide to Value Investing

Stock Market Crash; Should you wait for one to buy stocks?

Should I wait for a market crash to buy stocks?

We’ve all been there.

More often than not, I have looked at stocks that I wanted to own, but I couldn’t because I felt they were overpriced. And I hoped for a stock market crash to happen, so I could buy the same stocks at a lower price. I’ve also hoped for a market crash, just so I could get more returns on stocks I already own, as I can buy more of those when the market crash happens. 

I think every investor, at least once in their lifetime, has wished a stock market crash would happen, or at the very least they’ve pondered over the idea of buying stocks during a stock market crash.

I hate to break it to you, but that’s a terrible idea. Let me tell you why.

Why you shouldn’t wait for a stock market crash?


Timing the stock market

stock market graphs

People generally assume big institutions and seasoned investors on Wall Street have the ability to time the market, as they have a deeper understanding of how the market works than an average retail investor. The truth is, no one can time the market. It is not really a question of how much knowledge or experience you have, the volatile nature of the market just makes it impossible to predict the flow. Remember, not all stock market crashes were the results of a pandemic.

This quote from Peter Lynch, who managed Fidelity’s Magellan Fund (it had an average annual return of 29% over the course of 13 years), says it all: “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections than has been lost in corrections themselves.”

Best days and worst days of S&P 500

This is another reason why waiting on the sidelines is a bad idea. According to this data going back to 1930, Bank of America found that if an investor missed the S&P 500′s 10 best days in each decade, total returns would be just 91%, significantly below the 14,962% return for investors who held steady through the downturns.

Since we can’t time the best and the worst days, hold on to your investments through highs and lows. In the end, the stock market will reward you with returns. As the old saying goes ‘time in the market beats timing the market’.

Buying stocks on dips

Contrary to popular belief, there are distinct differences between market correction, market crash, and a bear market. A market correction is a drop in value of at least 10%, and less than 20% from a recent high. A market crash is a sudden and sharp decline in stock prices, in one day or a week. Whereas bear markets are the long, sustained declines in stock prices across 20%, and it often takes months.

However, these are not common. What is common is a dip, which is a brief decline in stock price, which happens over a couple of days or weeks, and is often short-lived. While waiting for a market crash, retail investors generally mistake dips for a market correction or even crash, which often results in investors buying a lot of stocks, hoping to amplify their returns. That leads to losing on your gains in the long term.

” When will the stock market crash? “

Like I mentioned, stock market crashes are not common. They happen very rarely. Since 1965, there have been only 8 drawdowns of 20% or more in the United States, once every seven years on average. Here is something most retail investors neglect – there is always a cost to wait. What if it takes two years or four years for a market crash to happen? You’ll lose out on significant gains during that time.

A study conducted observed that from 1926 to 2016 the U.S stock market returned 6.3% over cash. When looked at investors who waited to invest until a correction occurred, then measured their returns 5 years after those corrections happened (period measured included waiting period, crash, then 5 years after the crash).  Those investors that were disciplined enough to stay in cash until a correction happened, then put it all in the market for 5 years generated returns that were, about half of those they would have received if they just held stocks throughout the whole period.

That says it all. If you wait on the sidelines, with a lot of cash, not only will you lose its value due to inflation, at the same time, you will also lose out on capital gains, which you could have made if you had invested it in the market.

What you should do instead?


Stop waiting

a man getting ready

As it goes without saying, stop waiting for a stock market crash. Waking up every day hoping the world to end, so you can make some dollars is not how you want to spend your life. The problem with this thinking is that you actually assume that you can invest after a crash. Understand that it’s not as easy as it seems. You wouldn’t know at what point after the crash should you invest – should it be when the market is 15% down, or should I wait till the market goes down 20%? What if the market keeps going down?

You might look back at the events of March 2020, and think about the money you could have made if you had bought stocks during the crash. But in reality, it doesn’t work like that. When it is happening around you, when you see S&P 500 dropping points, it’s hard to put money into the markets, especially when you don’t know how long the downward trend will last, or what the future holds. Moreover, there is the fear of an impending recession or depression, which investors usually associate with a market decline.

Make the most of compounding

To quote the world-famous scientist Albert Einstein; ‘Compounding is the greatest mathematical discovery of all time’. Compounding, in simple terms, is generating earnings on top of your previous earnings. This simple example illustrates why compounding is significant in investing. If you invest $10,000 in the market earning 5% a year, in 20 years it would be worth $26,533. If you can manage to get that to 10% a year, the investment would be $67,275, in the same period.

For this phenomenon to work, three things are essential. The original investment should remain invested, the earnings should be reinvested, and the most important of all, time. The more time you give your investment to grow, the more exponential compounding effect, and the more valuable your investment would be.

So instead of waiting for a market crash to buy stocks, start today. Take out the cash, set up a brokerage account, perform stock valuations and invest in stocks or ETFs.

Use dollar-cost averaging

It is a strategy where equal amounts of dollars are invested at a regular, predetermined interval. The key to its success is sticking with the plan. By adopting this strategy, you will consistently put money into the stock market, regardless of how it is performing. With this strategy in place, you will buy fewer shares when the market is up, and more shares when the market is down, producing consistent returns in the long term irrespective of stock market crashes.

However, 95% of investors have been Dollar Cost Averaging wrong this entire time. Find out why on page 167 of our bestselling book The 8-Step Beginner’s Guide to Value Investing

The next Amazon stock; Watch out for these companies

Amazon(NASDAQ: AMZN) is the largest eCommerce company in the world. It is also the world’s largest online marketplace, AI assistant provider, live-streaming platform, and cloud computing platform as measured by revenue and market capitalization. It is the largest Internet company by revenue in the world, and it is the second-largest private employer in the United States[1].

Amazon ranks as one of the world’s top companies by market value. Amazon currently has a market cap of $1.7 trillion.

Started 20 years ago as an online bookstore, Amazon has managed to enter and dominate the e-commerce business. Jeff Bezos, CEO, and founder, who will be stepping down in the next quarter, has managed to transform Amazon from an online bookstore to one of the most valuable companies in the world. The stock market has rewarded it, as the share price is currently more than 100,000% up from its price at the time of Amazon’s initial public offering (IPO). This has made Jeff Bezos the second richest man in the world, after Elon Musk, CEO and Co-founder of Tesla (NASDAQ: TSLA).

Amazon has a reputation for entering well-established markets and disrupting the major competitors through technological innovation and mass scale. They started that with books, taking on booksellers and publishers around the world. They went on taking every major player in every industry they stepped into. As per its quarterly and annual financial statements, they have five major sources of revenue; Online stores, Amazon Marketplace, Physical stores, Amazon Web Services, and subscription services.

Amazon and the e-commerce industry

The company offers its customers a wide selection of durable and consumer goods along with digital-format products, such as e-books, videos, software, music, and games. As per the latest filings, 88% of Amazon’s revenue comes from retail sales. Online stores accounted for $197.3 billion in sales in FY 2020, or about 51% of net sales(revenue)[2].

The global pandemic had a major effect on online sales, as people turned to the retail giant for their everyday necessities. As an effect, out of the total online sales in the calendar year 2020 which accounted for $386.06 billion, grocery accounted for $75 billion, whereas in 2018, it accounted for only $25 billion[3]. To say Amazon dominates the online retail market would be an understatement. Amazon accounted for 47% of all online retail sales in the US and 30% of all online retail sales in the UK[4].

Over the years, Amazon under Jeff Bezos has acquired a number of companies to expand its reach and to enter other markets including online media. Major acquisitions include Audible, CreateSpace, Goodreads, IMDb, Whole Foods, Woot, and Zappos.

Amazon has had an effect on people’s lives, from how they spent their money to jobs and inflation. Those who believed and invested in the company have been rewarded with massive gains, with some even becoming millionaires. All of this has prompt investors to look for stocks that could be the next Amazon. Here are some stocks that fit the shoes.

The next Amazon stocks: 


shopify logo

Shopify is a platform that helps small and medium business sell their products online, by setting up an online store. Shopify provides a range of services to online retailers including payments, marketing, shipping, and customer engagement tools. The platform makes it easy for retailers, small or large, to enter the online marketplace, create an online shopping experience, establish a customer base, engage the customers and most importantly, sell their products.

As of January 2021, 3.6 million online stores in approximately 175 countries run on Shopify[5]. The total gross merchandise volume exceeded $61 billion for calendar 2019. Shopify revenue for the twelve months ending September 30, 2020, was $2.457 billion, a 73.4% increase year-over-year[6]. Initially released in 2006, the total sales on the platform has exceeded $230 billion as of Feb 2021.

Over the years, Shopify has turned out to be the ‘one-stop-shop’ for everything related to the online marketplace. They have continuously expanded their offerings aiming to help small and medium businesses in particular, as the founder, Tobi Lütke has often mentioned. This was particularly important as the whole world went into lockdown, due to the outbreak of COVID-19. Small businesses struggled the most and they had to find a way to get through the lockdowns, so they took everything online to keep their business afloat, where Shopify came to their rescue. E-commerce penetration in the U.S. took a steep increase from 16% at the end of 2019 to 27% at the end of April[7].

Shopify’s vision is centered around merchants- ‘focus on your products and let us take care of everything else’. Apart from the traditional easy-to-use eCommerce platform, Shopify offers a wide range of services, including emailing, shipping, and financial services.  Besides, with Shopify, setting up an online store only takes about 30 minutes, as no coding is required.

According to Forbes, Shopify’s Revenues could grow by over 3.5x from estimated levels of $2.6 billion in 2020 to close to $9 billion by 2025, representing a growth rate of almost 29% per year (for context annual growth was about 60% over the last three years)[8].

Shopify and Amazon

More often than not, Shopify has been compared with Amazon. While the former is seen as an entity that helps and serves the small and medium businesses to keep their businesses afloat, the latter is seen as a formidable force that preys off businesses. This perception comes from the experience businesses have with each of the platforms.

There have been reports suggesting that Amazon has been using sales data from each customer interaction of every brand on its platform, which brands often don’t have access to, to create products that compete with these same brands. Even if the brands can compete with the Amazon products in this unfair competition, the brands lose out on one of the significant factors of any business – customer data. Knowing who the customers are and communicating with them directly, taking feedback, and improving their products is key in the growth of a company, and brands are devoid of it. That’s the price they must pay if they want to be in the largest online marketplace.

And there is the ocean of counterfeit products on the platform, which according to Forbes, was what forced Nike to pull out its apparel and shoes off the marketplace. The user experience on the site hasn’t been good either when it comes to fashion products, especially for luxury brands.

This is where Shopify comes in. The platform enables businesses to have everything for themselves. They get to choose every single aspect of their online business. It is not just the ease-of-use to set up an online store that attracts merchants to Shopify. The platform allows them to create a unique shopping experience for their customers, and provide all the necessary tools to keep them coming back for more. All of these attract the merchants to use Shopify, which not only helps them in establishing an online presence, but to create and sell quality products, and use the feedback to improve them constantly.

Shopify might be a long way from where Amazon is, but they are here to stay. Their focus on the satisfaction of businesses is how they established themselves in the world of e-commerce, and as long as they continue to do that, they are on their way to the top and it is a stock to watch out for.


etsy logo on a wall

Etsy is the best performing S&P 500 stock of 2020. Etsy is an e-commerce platform that sells handmade or vintage and crafty items. It enables anyone who creates or designs handmade items or collects vintage items to sell them on the platform. Even though the majority of sellers on Etsy are in the US, which accounts for 62%, sellers from over 234 countries use Etsy to sell their products[9].

In 2019, the number of active sellers on the Etsy.com platform stood at 2.5 million and the site had 45.7 million active buyers who had bought goods through the platform. As of Q2 2020, there are 60.27 million buyers on Etsy[10]. The company has three primary revenue streams: marketplace revenues including fees for sales transactions and listings, seller service revenues, and other revenues including third-party payment processor fees. As of February 2021, the company has a market capitalization of $28.98 billion.

Etsy and Amazon

Etsy has been dominating the handmade market for several years. Even though their main competitor is Amazon, the retail giant is more of an ‘everything store’ where you can get literally everything, and the Handmade section of the platform is not quite popular among the 300 million active customers Amazon has. Whereas Etsy, with its 45 million active buyers has been doing really well, with its annual revenue rising from $125 million in 2013 to $818.79 million in 2019[11]. This was more prominent as the whole world went into lockdown. In the third quarter of 2020, the company generated a gross merchandise sales (GMS) of $2.63 billion, up from $1.2 billion in the corresponding quarter of the previous year. This represents a 119.4% year-on-year growth[12]. During that quarter, the company generated over $451.5 million in revenues, up from $428.7 million in the previous quarter[13].

If we look from the perspective of a seller, there are some major differences between Etsy and Amazon, starting with expenses. While Etsy charges 5% of the final value of each product sold, Amazon charges 15% of the final value of each product sold. In addition to that, there is a $39.99 monthly charge, if you sell more than 40 non-handmade items on one account and a minimum of $1 referral fee, whereas there is no monthly charge on Etsy. Moreover, when you sell on Etsy, funds are available to you as soon as the customer completes the transaction. However, on Amazon, it has a lengthy process and the fund transfer can take up to 24 days, as the fund is only transferred once the product is shipped. Also, when it comes to listing your handmade products on these platforms, Etsy has 160 defined product categories, whereas Amazon has only 14 narrowly defined categories and doesn’t allow products that don’t fit into these categories.

If we look at the number of customers on the platform, Etsy is nowhere near Amazon, as the former has 45 million active users, while Amazon has 300 million active users. Then again, people visiting Amazon might not be particularly looking for Handmade, but on Etsy, they are specifically looking for handmade products. Add it to the fact Etsy is cheaper to sell on than Amazon. Etsy has helped about 95% of its sellers to run a shop from the comfort of their home[14]. Also, 40% of buyers are repeat customers[15], which is key in the long term success. As more and more people are choosing to buy handmade items over mass-produced ones, they are likely to choose a platform that only focuses on Handmade and Vintage items, over an ‘everything store’.


chewy logo

Chewy is an online marketplace for pet food and other pet-related products. The company was acquired by PetSmart for $3.5 billion in 2017, which was the largest-ever acquisition of an e-commerce company at the time. Founded in 2011, under the name of Mr.Chewy, the company grew rapidly. Within 7 years of launch, the company crossed $2 billion in annual revenue[15], and they haven’t looked back ever since. Chewy’s revenue for the twelve months ending October 31, 2020, was $6.45 billion, a 40.99% increase year-over-year[16]. The company is currently valued at $44.19 billion.

We believe that Chewy has a long way to go, given that the global pet food market was valued at $90.13 billion in 2019, and is projected to reach $127.21 billion by 2027[17]. According to the American Pet Products Association (APPA) 67% of U.S. households, or about 85 million families, own a pet, which is up from 56 percent, 30 years ago. Besides, the pandemic has changed a few things. As more and more people were confined to indoor environments, pet adoption rose, as people were looking for a companion to spend time with. According to the Washington Post, shelters, nonprofit rescues, private breeders, pet stores — all reported more consumer demand than there were dogs and puppies to fill it. Some rescues were reporting dozens of applications for individual dogs. Some breeders were reporting waiting lists well into 2021. As for those people who already owned pets, the pandemic made them spend more time with their pets. Thus, they choose to buy food and other pet products for their pets online, since going out wasn’t really an option.

Moreover, the trend of buying pet products online, like everything else, is here to stay. The global pet care e-commerce market size was valued at $20.75 billion in 2019 and is expected to grow at a compound annual growth rate (CAGR) of 11.3% from 2020 to 2027[18]. According to Sumit Singh, CEO of Chewy, the company serves about 18 million customers, just a fraction of the estimated 100 million US pet-owning households. They are expecting to see even more growth as the company seeks to take more share in the $100 billion pet supplies market[19].

Chewy and Amazon

Chewy’s focus on customer experience is what makes them stand out from their competitors. Even while facing competition from giants like Amazon, their focus on customer service hasn’t changed a bit. As explained by the CEO himself, the company gets calls every day from customers who want to know what they should get for their puppies[20]. Chewy has customer representatives who can answer that. They can even suggest what you should be giving to a two-month-old Labrador retriever. When customers call up Chewy asking for ‘what should I do?’, their customer service representatives guide them through the steps, not only enhancing the customer experience but also building a relationship as the emotional aspect of taking care of a pet is involved.

There was even a story of Joseph Inabnet, whose dog, Bailey had passed away and Joseph wanted to return the dog food that was left, hoping to get a refund. Chewy gave him a refund but instead of taking the dog food back, they asked Joseph to donate it to a shelter or someone in need. A couple of days later, Joseph received a handwritten note from Chewy, along with an oil painting of his dog, Bailey. Chewy made sure that Joseph has a beautiful memory of his dog with him.

Through many similar instances, Chewy has shown that they are a company that cares, about their products, their customers, and more importantly, the pets. And Chewy has secured a place in the heart of pet owners around the world, with some even saying that they will buy from Chewy for life. That’s an advantage Chewy has over Amazon, while the latter is a place where you can get everything, the former focuses on a small but essential value proposition, and delivers it.

Chewy is one of the 10 stocks that we recommended, which are up more than 100% since our recommendation. You can find the other 9 stocks by subscribing to our email list here.

Emotional investing: Are your emotions costing you money?

Understanding emotional investing

Making investment decisions solely based on emotions often ends in disaster. In the ever-changing world of the stock market with all the market fluctuations, it’s no surprise that an average investor finds it hard to keep his emotions in check. Sometimes they overpower us, but mostly we let them. These result in poor investment decisions which affect your financial goals and most importantly, your returns.

The worst decisions in investing are the ones that are driven by emotions. It clouds your judgment, makes you ignore all the rational aspects and the possible outcomes, and you end up losing a lot of money.

Take this for example; Between 1997 and 2016, average stock market investors earned only 3.98% returns annually, compared to the S&P 500 index’s 10.16% annual returns. Why? They let their emotions take over and made illogical, bad short-term investing decisions to buy or sell more stocks, looking to gain profit or save money, and lose out on capital gains in the long term.

What triggers these emotions?

a man affected by emotional investing

Emotional triggers, as I would like to call them, can come in many different forms. Fear of missing out (FOMO), plays a major role in most of these. Especially when it comes to market volatility, the mainstream media seems to sensationalize any ‘worthy’ news it gets. This media hype often leads investors to make investment decisions without thinking too much.

By following the ‘now-or-never news, they buy more stocks, often overpriced, looking to make more profits with their investment portfolio in a bull market. Whereas in a bear market, they start selling stocks to minimize losses and mitigate risks, cashing out the stocks, and then look for less-risk options like savings products. As both of these can be emotionally overwhelming times(greed and panic), people tend to react to any news that, either present an opportunity or confirm what they are already thinking about.

Social media is another trigger. Since these platforms figure out our interests and likes faster than our friends, investors will likely come across ‘investment advice’ on these platforms. Most people who give out ‘advice’ on these platforms have experience ranging from 1-2 years at the most. Since they are presented and communicated in the best way possible, most of us fall prey to this. After all. who doesn’t like to know the ‘top 10 stocks to buy under $50 for 2021’.

It’s important to understand that the market itself is the biggest trigger. With ups and downs happening constantly, the volatile nature of the market can be worrying for many.  For an average investor, their hard-earned money is at stake, so naturally, their risk tolerance would be very low. Because, let’s face it, losing money is painful. So this constant fear about the investment performance can be stressful. As humans, we tend to act based on emotions more, when we are under a lot of stress, and that often leads to making decisions without rational and reasonable thought, which most of the time, makes the situation worse.

How to avoid emotional investing?

We, humans, are creatures of emotion, no doubt about that. Every decision we make involves some amount of emotion, or else we wouldn’t be able to make any. However, it’s important to have a clear distinction between having emotions and being driven by them.

In the ever-changing world of the financial market, it can be hard to keep your emotions in check. But there are a couple of things that you can do to channel your emotions for your benefit.

Have an investment plan

open diary and a pencil

As the saying goes, ‘Hope for the best and plan for the worst, it’s crucial to have an investment strategy that clearly aligns with your long-term goals and financial capabilities. When the times are favorable, instead of only looking to make maximum profits, make sure every decision you make aligns with your investment objectives. Also, when times are tough, and the emotions overwhelm you, it’s important to have something you can stick to. Understand that market volatility doesn’t usually last, and if you buy or sell according to the ‘trend’ of the market, you will lose money in the long run. So have a plan, write down your goals, and stick to it, all the time.

Educate yourself

Understand that market risk exists. Know that you will come across market corrections and bear markets during the course of your life as an investor. Market corrections are a drop of 10% or more from a recent market high, whereas bear markets are usually defined as a decline of 20% or greater. Since 1950, there have been 36 corrections in the S&P 500 and there have been 26 bear markets in the S&P 500 Index since 1928. Despite that, S&P 500 has had an average annual return of 10-11 % since its inception in 1926 through 2018. How?

Because there have also been 27 bull markets, and stocks have risen significantly over the long term. When it comes to market corrections, on average, within four months after a correction, S&P 500 reaches its pre-correction peak – roughly the same amount of time to recover as the initial decline took.

So it is quite important to educate yourselves on the various aspects of the market cycles, including the reasons behind a market crash/correction or a bear market. Knowing these will help you in staying away from all the noise during the good and bad times, and to keep your head straight, even when everyone around you is losing theirs.

Use media as a tool

I can’t emphasize how important it is.

Media is a tool, not your financial advisor.

Like all tools, if you don’t use it carefully, it can bring damage. Don’t get me wrong, it is important to be updated on what is going in the market, but the headlines shouldn’t determine your investment strategy. It is easy to get caught up in the over-hyped news, whether it is a bull or bear market. But making investment decisions based on the news you hear, without rational thought, you ignore factors like the long-term effects or other business and economic contexts. You might feel like you are acting based on your ‘instinct’ when in reality you are jeopardizing your investment objectives in an emotional gut response.

Take the time to go through the news, and when making a decision ask yourselves, “does this align with my investment goals?”If not, it probably isn’t worth it, and always, I repeat – always, see the bigger picture.

Additional measures:


Stop checking your investments every day

This might sound silly, but it’s a good way of ensuring that you’re not affected by the short-term volatility that is frequent in the market. Then again, after a couple of years as an investor, you’ll start doing this yourself.

Ditch the herd mentality

It’s the innate characteristic of a human mind to follow the crowd, but let’s not do that here. Consider GameStop for an example; when everyone is talking about it and buying it, you might have the urge to do the same. By doing so, you’re acting based on societal perception rather than your own research. And when it works against you, you’ll blame yourself.

Use a long term investment strategy

There is an old saying, “time in the market beats timing the market”. So instead of trying to time the market, use these long-term investment strategies that not only will ensure you don’t make any spontaneous emotional decision, at the same time this will help you sleep in peace at night, even during the worst of times.

  1. Diversification: Diversifying is when you invest across different asset classes(stocks, bonds, funds), different industries, or different geographies. This asset allocation offers protection against the volatility of the market. Since it’s highly unlikely that all markets will go down at the same time, the less-performing assets will be balanced by gains from others.
  2. Dollar-cost averaging: It is a strategy where equal amounts of dollars are invested at a regular, predetermined interval. The key to its success is sticking with the plan. This will ensure that you are not carried away every time you see ‘breaking news. Set the plan and don’t interfere with it, unless major changes are required.

Journaling your ideas

Every time you see a stock you’re interested in owning, write it down for further research. Use this logbook to perform efficient research that will help you value the company and understand whether it’s worth investing in or not. The video below explains how to use the logbook.

Get the free digital versions of the logbook here and the spreadsheet here. If you would like to have a physical copy, as I do, you can get it here.

Coffee ETF: Is it the right choice for investing in Coffee?

Coffee is inarguably one of the most consumed beverages in the world. Being one of the ‘breakfast commodities’ along with orange juice, the rich aroma of the brewed coffee has made it equally popular among the old and the new generation. Over 2.25 billion cups of coffee are consumed in the world daily. Over 90 percent of coffee production takes place in developing countries—mainly South America—while consumption happens primarily in industrialized economies[1]. Coffee is the most valuable and widely traded tropical agricultural commodity and 25 million smallholder farmers produce 80% of the world’s coffee[2].

Growth in the world of coffee consumption

The worldwide coffee consumption has risen from 146.98 million 60 kilogram bags(the standard measure for coffee) in 2012/13 to around 165.35 million 60 kilogram bags of coffee in 2018/19[3]. The United States is the largest consumer of coffee in the world, with nearly 500 million cups a day. The US consumed a total of 27,430,000 60kg bags in 2019/20[4]. However, if you look at the average per capita consumption of coffee, the Netherlands tops the chart with 8.3 kg per capita, whereas in the US it is 3.5 per capita.

However, there are countries where coffee consumption is not prominent. China, the most populated country in the world has one of the lowest coffee consumption rates with an average of just one cup a year[5]. However, the coffee consumption rates are growing at 30% per year, compared to the international rates of 2%[6].

Investing in Coffee

coffee beans

There are different ways by which you can invest in the coffee market. Like any commodity, there are a number of products and services that are dependent on or associated with coffee. Coffee plantations are an example of direct investment. However, since the majority of coffee production is concentrated in a few countries, factors such as climate change could potentially affect the investment.

Soft drink manufacturers and other companies that sell coffee-based products are another option to consider. Companies such as Nestle who sell coffee-based products such as Nescafe and Nespresso are a good investment option if you don’t prefer directly investing in coffee production.

Coffee ETFs

There is only one kind of exchange-traded fund or ETF when it comes to coffee. These coffee ETFs track an index that holds coffee futures. One such ETF is the iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO).  Another ETF that tracks the performance of the coffee futures index is the iPath Pure Beta Coffee ETN.

An ETN is different from an ETF. While equity ETFs own the stocks in the index that it tracks(if the ETF is tracking S&P 500, then it will own stocks of all 500 companies), an ETN does not provide the ownership of the securities to the investors. They only pay the returns of the index they track. Hence, ETNs are similar to debt securities.

iPath Dow Jones-UBS Coffee Subindex Total Return ETN (JO)

The iPath Dow Jones-UBS Coffee Subindex Total Return ETN tracks Dow Jones Coffee Index by holding coffee futures contract in the most nearby month. The fund also has cash collateral invested in US Treasury bills and includes the rate of interest earned. The expense ratio of the fund is 0.75%. There is no dividend yield since the fund’s holdings are futures contracts. The total assets value over $100 million.

The iPath Pure Beta Coffee ETN (CAFE)

The iPath Pure Beta Coffee ETN tracks the Barclays Capital Coffee Pure Beta Total Return Index. Similar to JO, this too holds coffee futures contracts but differs in its investment strategy. Similar to JO, this fund also has an expense ratio of 0.75%. However, the totals assets value at only $5 million.

It is to be noted that, climate changes, political upheaval, and changes in supply and demand make the coffee futures volatile.


Coffee ETF, Coffee companies, and ‘Coffee the commodity’

coffee plants

With coffee ETFs, note that you won’t essentially own any coffee companies by investing in these funds, as these track an index and hold coffee futures contracts, which is a commodity.

When it comes to investing in coffee as a physical commodity, there are a number of factors that need to be considered. Since the majority of coffee production is limited to a few countries, factors such as climate change and political upheaval can affect the prices quickly. Another factor is the demand. Since coffee is not a necessary staple like wheat or rice, the demand largely depends on discretionary income and spending patterns. Commodities, including coffee, are traded in US dollars. A strong US dollar can depress the coffee prices and a weak dollar, well, is good for prices.

Investing in coffee companies is another.


Biggest coffee companies in the world

starbucks coffee cup

Some of the biggest companies in the coffee industry or make coffee-based products include Starbucks, Nestle, Restaurant Brands, Dunkin’ Brands, and Coca-Cola.


Starbucks is one of the most popular names when it comes to coffee and coffee shops. They are the world’s largest coffee house chain, with more than 30,000 locations spanning across 70 countries[7]. Even though Starbucks is primarily a coffee shop, it serves diverse products such as teas, hot chocolates, smoothies, iced drinks, and a wide variety of food items. Starbucks has a market capitalization of $115 billion. Their net revenue has risen from $14.9 billion in 2013 to 26.51 billion in 2019. The highest portion of the revenue came from the US with $16.65 billion[8].


Dunkin’ is the second-largest coffee company in the world. With approximately 12,900 locations in 42 countries, the company is also one of the largest donut shops in the world[9]. Their products include donuts, bagels, coffee, and munchkins donut holes. Initially acquired by Baskin Robin holding company Allied Domecq, the company was bought by Inspire Brands in 2020. Dunkin’ Brands generated approximately 1.37 billion U.S. dollars in revenue in 2019, up from 811 million U.S. dollars in 2015[10].

Tim Hortons

Tim Hortons is the third-largest coffee house in the world. With more than 4,846 restaurants in 14 countries[11], the Canadian multinational fast food restaurant chain is another name in the neighborhood when it comes to coffee. The company was purchased by Restaurant Brands International, which also owns similar brands such as Burger King and Popeyes. Their revenue for 2019 was approximately 3.34 billion U.S. dollars[12].

Why do we like Starbucks?


starbucks coffee shop

Besides the fact that they are one of the largest coffee companies in the world, there are certain aspects that make Starbucks one of our favorite companies. Many believe that Starbucks is too expensive. They are right, in a way. $5 dollar for a cup of coffee is a little too much, but is that really what we are paying for?

Over the years, Starbucks has become the go-to place for meetups, dates, and informal meetings. Rather than a coffee shop, it has become a place where you can spend time with your friends, family, or even colleagues, considering that many business meetings are also organized at Starbucks. Also, as the number of remote workers is increasing, more people are changing Starbucks into their workspace.

So, the answer is, they are not paying $5 for a cup of coffee, they are paying for the experience and ambiance that comes with it.

Here are some other factors that indicate that Starbucks is built to stand tough times.

Brand Loyalty

Starbucks is one of the brands that know how to treat their customers just right and make them come back again and again. The added food options and the ambiance of the shops make the customers think of Starbucks when they think of getting a coffee. Apart from this, they have a pretty impressive loyalty program for their customers. It allows them to order ahead of time and also provides free refills of hot coffee or tea in-store. Getting to the top of the loyalty tier will get you free snacks and food as well.

This will keep them coming back.

Prior Experience

If we look at how Starbucks handled previous recessions, they focused on winning back their customers’ trust. They started with a survey with questions about the customer experience. Seeing the huge response, they implemented many of the recommendations given by the customers. This helped them sail through a hard time. Even though this does not guarantee that they will perform the same way in future recessions, their focus on customer satisfaction will go a long way in handling tough times.


To make most of the brand loyalty and recognition they already have, they began selling their coffee in supermarkets. They also partnered with many delivery companies and have been expanding their drive-thru and mobile ordering platforms. All of these will enable customers to interact with the brand using these diverse options.

Starbucks is one of our top 20 stocks to own for the next 20 years. You can find the other 19 in our bestselling book The 8 Step Beginner’s Guide to Value Investing.

Instagram stock: How to invest in Instagram?

How to buy Instagram stock?

Instagram is one of the most popular social media platforms in the world right now. The number of monthly active users has grown from 30 million in 2013, to one billion in 2020. Started initially as a photo-sharing app where you could share photos and videos with your friends, it has grown to be the home of celebrities, content creators, brands, and friends across the world. Instagram is visually stunning and has features such as Stories, Reels, and Direct Message which has enabled advertisers to use Instagram to reach a youth audience of 83 million (aged between 13-17).

How to buy Instagram stock?

The answer is you can’t. The reason being the company is not listed as Instagram on a stock exchange. Instagram is owned by Facebook FB, the biggest social network. So ideally, if you want to invest in Instagram, you can buy stocks of Facebook using a brokerage account, and thereby, owning Instagram and a number of other companies under Facebook including WhatsApp.

Facebook Stock Price


rising price of Facebook's stock
Facebook has a market cap of $721 billion. That places FB stock among the sixth-most-valuable companies on the S&P 500 index, behind AppleMicrosoft, Amazon, Alphabet, and Tesla. Facebook shares currently trade at $251.79 per share.


How Facebook makes its money?


graph showing the ad revenue of Facebook over the years

Facebook makes money from ads. With over 2.7 billion monthly active users as of the second quarter of 2020[1], nearly all of their revenue comes from advertising. Facebook revenue for the twelve months ending September 30, 2020, was $78.97 billion, an 18.71% increase year-over-year[2].

Their ad revenue has grown from $6.9 billion in 2013 to $69 billion in 2019, a 1000% increase in six years. During the last reported quarter, the company stated that 3.14 billion people were using at least one of the company’s core products (Facebook, WhatsApp, Instagram, or Messenger) each month. In 2021, the social media network is projected to generate $94.69 billion in ad revenues[3].


Why did Facebook buy Instagram?


logos of Facebook and Instagram in sand

After Kevin Systrom and Mike Krieger launched Instagram in 2010, the responses came very quickly. Instagram gained one million registered users in two months and 10 million in a year. In April 2012, Facebook purchased Instagram for approximately $1 billion in cash and stock.

Information is, it was a time when Facebook has been experiencing problems with mobile users, Instagram caught their attention. Also, Twitter was the only competitor Facebook had then, which had already bid for Instagram but couldn’t pull off a deal. Also at the time, Facebook was gearing up for its initial public offering(IPO).

On its own, Instagram was not much of a threat, and neither was Twitter. But many Instagram users often exported their photos on the mobile app to their Twitter accounts. Acquiring Instagram could’ve given Twitter a sudden leg up in mobile, where Facebook was still in the midst of a tricky technology shift[4].

Fast forward to 2020, Instagram has more than 1 billion monthly users, including 500 million daily users of Stories, which was introduced in 2016 to compete against a popular feature of the same name from Snapchat. That growth has resulted in Instagram being valued by analysts at more than $100 billion, or about one-fifth of Facebook’s total market cap. Even though Facebook owns Instagram, it remains a separate platform to this day.

Facebook reaches 59% of the world’s social networking population and they have been trying to make the most of this vast userbase, a part of that has led to the launch of Facebook Dating.


What is FB Dating?


FB dating on mobile screens

Facebook Dating is an online dating platform. It allows people to find potential dating partners online using their Facebook account. The platform is currently available in 20 countries including Brazil, Canada, and the United States[5]

This is a move to take over the online dating community which has huge opportunities for growth, adding to the fact that Facebook already has 2.7 billion active monthly users worldwide. The projected revenue in the online dating market for 2021 is $3.24 billion[6]. Currently, Match Group dominates with 60% of the market share[7] and in 2019 their revenue was $2.05 billion, rising from $788 million in 2013.


Is Match Group a good investment?


Logos of Match group, PlentyofFish, meetic, Tinder, OurTime, TWOO, Lovescout 24, Okcupid, and pairs

We like Match Group better, as it has diverse product options like Tinder, OkCupid, Hinge, OurTime, etc. Tinder has been downloaded more than 340 million times (iOS and Android) and is available in 190 countries and 40+ languages. Even phrases like ‘swipe right/left’ on Tinder found their way to the English language and clearly depicts the impact the brand had on pop culture. Tinder’s combined annual revenue has grown 920% between 2014 and 2019, exceeding 2.2 billion US dollars in total for 5 years.

Statistic: Annual revenue of the Match Group from 2012 to 2019 (in million U.S. dollars) | Statista

As of 2020, they have 10.8 million paid users worldwide. In addition to that, worldwide lockdowns had a major effect, as Match Group saw a fifteen percent increase in new subscribers(paid users) in the second quarter of 2020 and a record-breaking 3 billion swipes on Tinder in one day in March when lockdowns began. From March to May of 2020, OkCupid saw a 700% increase in dates[8]Data indicates that downloads of Hinge grew over 100% year-over-year (from 2018 to 2019) and revenue increased by approximately 400%.

Match Group’s stock symbol is MTCH(NASDAQ) and the current stock price is $149.05 per share.

Also, if you would like to know about 7 other stocks similar to Match, that we like better than Facebook, join our email list here.