Lesson 40: The 50 Laws of Stock Market Success

Now that you’ve reached the last level of the course, we want to pull together the most powerful investing concepts we’ve covered so far.

In addition, we’ve peppered in a few thoughts and insights not covered anywhere else in the course.

Be sure to check back as we keep this list updated.

Below, in no particular order, are our 50 Laws of Stock Market Success:

  1. Stocks generally return 7-10% per year over long periods of time. In any given year, they could do far better or far worse than that.
  2. Over longer stretches of time (10-15+ years), the market almost always makes money. The S&P 500 has made a profit during every 15-year stretch since 1926.
  3. Pay attention to dividend stocks, because roughly 40% of the stock market’s gains tend to come from dividends (although it varies over time).
  4. Small improvements in your investing returns can make a HUGE difference in your wealth over time.
  5. Nearly 75% of all the stocks on the market are small-cap stocks, micro-cap stocks, or nano-cap stocks. Investors often refer to all three of these groups together simply as “small cap stocks.”
  6. Historically, small stocks have performed better than large stocks (but they have also been more volatile and erratic in their returns).
  7. Healthy markets regularly experience pullbacks and corrections. Even bear markets are a normal part of long-term economic growth.
  8. After stock market declines, recoveries can provide huge gains over the following one, five, and ten-year periods.
  9. Don’t try to time the market. It’s very difficult to do well and missing out on just a few days of strong market performance can seriously hurt your long-term returns.
  10. To survive a stock market selloff, don’t panic, tune out the noise, stay diversified, carefully analyze your situation, and look for high-quality stocks to buy at discount prices.
  11. There are several investing strategies (such as buying value stocks, high-quality stocks, and high-yield stocks) that have beat the market by a wide margin over time.
  12. Our research suggests combining strategies can be an incredibly powerful approach that performs better than any individual strategy on its own.
  13. Our research suggests that buying value, growth, dividend, and quality stocks has offered higher returns when they’re small companies than when they’re large companies.
  14. The barbell strategy will allow you to invest most of your money in low-risk / low-reward stocks and a small portion of your money in high-risk / high-reward stocks.
  15. Most investors should own between 10-30 stocks in their portfolio.
  16. Beginner investors can work up to 10+ stocks over time and more experienced investors may hold more than 30 stocks (especially across multiple accounts).
  17. Research suggests owning at least 12-18 stocks provides enough diversification.
  18. Diversification means buying enough different stocks so that you aren’t unintentionally placing big bets on things that provide risk without upside return.
  19. Taxes reduce your long-term profits because you pay out cash from your capital gains which reduces how much money you have available to invest.
  20. There are several strategies to reduce your investing taxes, including tax-loss harvesting, holding winning stocks for at least a year, owning stocks in tax-advantaged accounts, donating shares to charity, and relocating to a more tax-friendly state.
  21. Over 100 years of extensive research has shown that buying value stocks is one the best strategies for making money and beating the market. Over time, it has consistently outperformed most other investing strategies. However, value investing can have long stretches of underperformance which is why we don’t recommend value investing only on its own.
  22. Instead, we recommend filtering out overvalued companies from all your other stock-picking strategies, including dividend, growth, small cap, and blue-chip stock investing.
  23. Value investing isn’t about the price of the stock. It’s about how much you get (a lot) relative to what you pay (a little).
  24. Our research shows that deep market sell-offs can act almost like an overstretched rubber band that snaps back into place, driving a fast and strong recovery.
  25. We accept normal market volatility, but we try to spot and prepare for the enormous drawdowns that come from economic recessions.
  26. Recession forecasting involves using robust economic data and forecast modeling to spot upcoming recessions and adjust our investment strategy accordingly.
  27. Once you spot a recession coming, you may want to “play defense,” which involves sidestepping the upcoming decline by moving your money into something low-risk.
  28. Alternatively, you may want to “play offense,” which involves embracing the upcoming decline by moving your money into something that profits when the market declines.
  29. Develop a clear investment strategy that’s based on your personal financial goals and appetite for risk.
  30. Many people who grow rich from investing learn to live on less than they make and intelligently invest the rest.
  31. Using proven strategies to buy the best stocks combined with patient and logical decision making can build tremendous wealth over the long term.
  32. Don’t pick any hard holding period and blindly stick by it (for example, don’t “buy and hold”). Instead, constantly ask yourself, “Are these the best possible stocks I could own given my investment goals?”
  33. We believe you should rebalance your portfolio often, relying on the latest information to make sure you’re always holding the best stocks for your goals.
  34. Smart investors rely on stock investment newsletters, financial advisors, investment clubs, financial data providers, or other methods of getting high-quality, up-to-date analysis on the best stocks without having to dedicate dozens of hours each week to research.
  35. In our experience, picking the best brokerage comes down to low trading commissions, a good website and mobile app, and helpful customer service.
  36. Low trading commissions are especially important if you’re starting off with a relatively small amount of investment money. In that case, trading fees can eat into your profits.
  37. In general, frequent trades that will result in booking profits in under a year (qualifying as a short-term capital gain) are best traded in tax-advantaged accounts, such as IRAs.
  38. If you’re trading slower, more long-term strategies (for example, deep value investing), you may want to place those trades in a regular taxable brokerage account.
  39. Remember the wise words of value investing legend Benjamin Graham: “In the short run the market is a voting machine, but in the long run it is a weighing machine.”
  40. Even the best, most legendary, investors only beat the market 60% – 70% of the time. The rest of the time, they underperformed their benchmarks.
  41. Most high-performing investors only pick winning stocks 50% – 70% of the time. It’s not common to be right on all of your stock picks.
  42. Losing money on some stocks and during some stretches of time is an unavoidable part of stock market investing.
  43. The market goes through long and short cycles of volatility, and can spend long stretches of time in states of high or low volatility.
  44. Based on our research, the most powerful metrics for finding profitable stocks are sales growth, earnings growth, free cash flow growth, net profit margin, price / free cash flow, price / sales, dividend yield, payout ratio, dividend growth, and beta. 
  45. Watch out for common cognitive biases, they can lead to poor decision making that hurts your long-term investing profits. 
  46. To avoid investing scams and rip-offs, work with a reputable broker, don’t look for “get rich quick schemes”, and make your own well-informed investment decisions.
  47. Don’t focus on buying just a handful of stocks that are familiar to you, offer lovable products, or are hot in the media. Try to keep an open mind and invest in the best possible companies on the market (as defined by your personal investing goals).
  48. Check your portfolio frequently enough to keep your stocks balanced and your dividend payments properly invested. Don’t check so frequently that you hang on your portfolio’s every move. 
  49. If you play the game on the stock market’s terms, you’re very likely to make a lot of money over the long-term. But if you try and bend the stock market to play the game YOUR way (fast, immediate returns, forever), you’ll very likely be disappointed.
  50. If you can return a few percentage points more than the market during up years and decline a few percentage points less than the market during down years, you’ll earn incredible long-term profits.

Todd Lincoln


Passionate stock market investor with deep experience trading small cap, dividend, and growth stocks.

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