To get a comprehensive understanding of a stock, it’s important to use a few different stock market investment basics

Stock market investment basics involve a variety of considerations. Many investors look for patterns or signals in domestic or international politics, or in demographic data. Other investors feel they can beat the odds and cut their investment risk by selling some or all of their stocks in times of high risk, and buying them back when risk is low.

The tips below aim to give you some insight into safe investing in the stock market.

Stock market investment basics: U.S. presidents and market movements

An investor recently sent me a copy of a research study that compared the performance of the stock market under U.S. presidents since World War Two, starting with Democrat Harry Truman (President from 1949 through 1953, 69.3% total return in his 4-year term). The study aimed to see if the market performs better under a Republican or Democratic President.

I then came across a similar study that went back to Republican Herbert Hoover (President 1929 through 1933; 77.09% total loss in his 4-year term).

The average total return during terms under a Republican president was 16.61% (1.71% yearly); under a Democratic president, the average gain was 57.44% for each 4-year term (10.83% yearly).

However, statisticians say there is no clear advantage under presidents from either party. That’s because of the large random skew in total returns during past 4-year presidential terms. For one thing, Democratic presidents happened to spend their first term in office during the three most profitable 4-year terms: Franklin D. Roosevelt’s first term (1933-1937—total return of 205.48%); William J. Clinton first term (1993-1997—total return of 97.85%); Barack Obama’s first term (2009-2013—total return of 90.7%).

Any successful investor can tell you it’s a mistake to base investment decisions on any one factor, even something as important as the party membership of the U.S. President.

Even if both parties were absolutely consistent in their politics for decades, it would still be foolish to overlook the varied events that take place outside the White House in every term, largely out of the President’s control: Wars, economic booms and recessions, changes in international monetary conditions, changes in commodity prices and availability, and on and on.

The funny thing is that some investors do sometimes base huge investment decisions on the results of a Presidential election. These decisions may work out well or badly, due to the large random element involved. This is just as true today under the administration of President Trump.

Stock market investment basics: Look beyond financial indicators

When they first set out to formulate an investment strategy, many investors decide to focus their stock market research on a handful of measures. For instance, they may want to see a p/e ratio (the ratio of a stock’s price to its per-share earnings) below 15.0, say, along with an earnings growth rate of 20% or more a year, and perhaps a 2% dividend yield.

This approach worked a lot better in the pre-computer age, when investing was more labour-intensive. Few people wanted to dig through old newspapers, annual reports and other material to get at the data. So more gems were left to be found by those willing to do the work.

Today, if you find a stock with this (or any comparable) combination of favourable ratios, it probably comes with some more-or-less hidden drawback not covered by your system. Instead of steering you away from investments that you don’t understand, or that harbour hidden risk, this system will steer you toward them.

Stock market investment basics: Predictions never work out as well as hard facts

You see this again and again in investing. Stock market predictions are terrible at determining what effect changes will have on an industry. It’s even harder to predict how long those changes will take to appear. Of course, adverse changes are hardest on companies with bad financing, poor products, weak management or other drawbacks. Meanwhile, successful companies figure out ways to adapt and even profit from change.

Most successful investors agree that it’s a good idea to base investment decisions on facts rather than stock market predictions. You can make mistakes with facts, of course, but predictions have a much higher failure rate. However, one obstacle to investment success is that it’s easy to mix the two up.

Stock market investment basics: Give your investments time to pay off

Resist the ever-present urge to buy and sell. A sound portfolio, built through careful research, needs surprisingly few changes over the years. Trading less frequently is a good thing, because it gives you fewer occasions to make costly mistakes.

Are you surprised to hear that there is no clear advantage under presidents from either party in terms of market performance? Please share your thoughts with us in the comments.