3 Mindset Shifts For Higher Stock Market Returns
By: Marc Guberti
Tags: Work, Investing, Stock Market, Money, Finance

3 Mindset Shifts For Higher Stock Market Returns

Think like a successful investor if you want to become one

The stock market presents investors with an excellent opportunity to watch their money grow. Some investors use the stock market as a path to become millionaires, and you can be one of those people now or in the future.

To get increased returns from your stocks, there are 3 mindset shifts you have to make. You will view every stock differently after going through these mindset shifts and see opportunities differently after making these mindset shifts.

#1: Caring More About Valuation Than Stock Price

Most beginner investors think Amazon is expensive because it carries a stock price north of $3,000. While a share of Amazon costs far more money than a share of Workhorse (roughly in the low $20s at the time of writing), Amazon looks expensive.

However, when you see that Amazon has a Price-to-sales ratio of 4.55while Workhorse has a P/S ratio of over 3,000, it’s clear which stock has a more stretched valuation.

Stretched valuations present higher risks. If Workhorse doesn’t get the USPS contract (main catalyst for its high price), the multiple can contract, and it’s contraction would be devastating for the stock.

The P/E ratio is a great way to compare profitable value stocks while the P/S ratio is better for growth companies that are more focused on growth and narrowing losses.

I personally prefer to use the Price-to-book ratio than the P/E ratio because a P/B under 1 almost always indicates a steal. These ratios matter far more than the stock price in telling if a company is expensive or cheap.

#2: Look At Market Cap

When we invest in stocks, we think about what will happen to our money. The goal with every stock pick is to see extraordinary gains. While this is obvious, it begs a subtle but important question…

How do we see those extraordinary gains?

There are no guarantees in the stock market, but there are ways to statistically boost your chances of seeing an incredible gains in the stock market.

One of those ways is to look at each stock’s market cap before you buy it. The way most people hear about market caps is when a conglomerate reaches a new milestone.

When you hear something like Apple becoming a $2 trillion dollar company, they’re talking about market cap. As of writing, Apple stock goes for $123.05/share and is a $2.09T company.

When most people think about a stock doubling in value, they think of the $123.05 share turning into a $246.10 share. While that math certainly checks out, we should look at market cap instead.

For Apple shares to double in value, a $2.09T company must become a $4.18T company. Apple must generate enough revenue and have enough growth opportunities to add another $2.09 Trillion to their market cap. While it’s possible, it’s a herculean feat that requires Apple to go where no company has gone before.

Then if it reaches $4.18T, it would have to achieve an $8.36T market cap for the stock to double again.

Now let’s look at Magnite, a relatively unknown stock in the CTV space which trades at a roughly $2B market cap. For that stock to double, it would have to go from a $2B market cap to a $4B market cap. That’s far more doable than adding an extra $2T to your market cap.

For Magnite to 10X, it would have to become a $20B company. I like those odds far better than Apple becoming a $20T company.

Most people who beat the market build a portfolio around mid-cap stocks because they have more room to grow. It requires less effort for a company under $1B in market cap to double in value than a company with a $1T market cap.

#3: Don’t Panic During A Market Crash

When stock prices go down, understand that the company hasn’t changed (unless there is significant news about the company such as an earnings report).

For some companies, the stock price can go up or down 10% or more on no news around the company.

This means that even if you are in the red, the investment you bought is the same. Understanding this truth will allow you to avoid the classic mistake of buying high and selling low.

Riding the down turns and not panicking during a market crash (the same applies for corrections) will prevent you from losing over $40,000 the way I did. I talked more about that experience and what happened in the article below.

When a solid company remains unchanged other than a reduced stock price, it’s a tremendous buying opportunity.

Buying opportunities don’t always show up, so take advantage of every buying opportunity you get and don’t panic on the dips.

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