12 Steps to Make Big Money in Stocks

Stocks provide an amazing and passive way to make big money on the side. If you're willing to do a little research, there is big money waiting to be made. I've made almost $100,000 with stock investing and I'm going to show you how. Follow my 12 steps, make some money, and have some fun!

 12 Steps to Make Big Money in Stocks

12 Steps to Make Big Money in Stocks

12 Steps to Make Big Money in Stocks

I’ve made nearly $100,000 in the stock market. Have I told you that I love investing in stocks?

Well, I do. It’s one of the best ways to take your money and turn it into more money!

Just yesterday I was talking to my wife about our stocks. I looked over and saw our little money tree chilling on a table and I said, that’s what our stocks are like.

They’re like a money tree that keeps on giving!

But, just like all of life, it’s not that simple. You can’t just jump into stocks and begin making money without any understanding of what you’re doing.

To make money in stocks you have to:

  1. Have some money to invest with.
  2. Understand how to pick stocks that will actually make money.

According to Market Watch, about 1 in 20 mutual fund managers beat the S&P 500. (The S&P 500 is the top 500 stocks in the stock market)

If only 1 out 20 stock pros can actually make more money than just following the top 500 stocks how the heck are you going to do it?

I’ve done it every year since I’ve begun investing and I’m going to show you my favorite strategy to do it.

My Strategy is Long Term

One thing you have to know up front is that my strategy is long term. I’m not doing any day trading or quick buy and sells with this strategy.

I buy and hold for extended periods of times.

The great thing about doing it this way is that it makes it easier for anyone to get into stock trading. If you have a day job, no problem. You won’t be staring at stock charts all day so it won’t interfere with your daily life.

With this strategy, I am creating a money tree and watching it grow. It’s long-term, so I only take money out if it is absolutely needed.

If your looking for a day trading strategy look elsewhere because this definitely is not it.

The Badass Stock Portfolio

I’ve been doing this since 2001 and have had great results. A while back I decided to begin sharing my strategy with others and have created a page on Let’s Automate Your Money that shows my current stock positions in my Badass Stock Portfolio.

You can check out my stock positions and returns here.

Disclaimer

There is always a risk in investing. This is MY strategy and you should seek out a financial advisor for your unique situation.

Here is my legal disclaimer about stock investing:

Past performance is not indicative of future results. I do not guarantee any specific outcome or profit. You should be aware of the real risk of loss in following any strategy or investment discussed on this website or on the show. Strategies or investments discussed may fluctuate in price or value. Investors may get back less than invested. Investments or strategies mentioned on this website or on the show may not be suitable for you. This material does not take into account your particular investment objectives, financial situation or needs and is not intended as recommendations appropriate for you. You must make an independent decision regarding investments or strategies mentioned on this website or on the show. Before acting on information on this website or on the show, you should consider whether it is suitable for your particular circumstances and strongly consider seeking advice from your own financial or investment adviser.

If you’re still on board, lets rock. Here is my Money Tree Stock Investing Strategy.

1. Open an Investing Account

 Robinhood

Robinhood

Before you can even begin to start investing, you’ll need to open an account.

I love Robinhood. It’s one of the best investing apps out there.

It has a great web and app interface. It has $0 fees. Yes! No fees at all. It’s super easy to use and they just keep building onto it. 

Open an account at www.robinhood.com and add your bank account. In a day or two, you’ll have your money in your account and you’ll be ready to get started!

2. Invest Enough Money to Make Good Returns Fast

Yes, you can start investing today with a $100 dollars or less, but if you want to make money in stocks, especially, big money. You’re going to need to invest some serious money to get it rolling.

Now, I would never suggest you start investing today with $10,000 when you are still learning how to invest in stocks, but if you want to start making some serious, life-changing money in stocks, you’re going to have to go full fledge in.

$10,000 is a good starting point to begin making some serious money in stocks.

If you’re brand new, start small. Play with $100 - $500, but begin saving money to get a much higher balance once you have a handle on what you are doing.

With $10,000 you can easily make average jobs pay for the day if the markets are doing well you know how to invest! 

Plus some of my favorite stocks are over $1,000 per share, so you can’t even get access to them when you have $500 to work with.

So, start small to learn, but also start saving some money to really boost your investment account quickly.

3. Brainstorm Your Dream Team of Companies / Stocks

It’s time to brainstorm!

Grab a piece of paper and pen or open up your laptop. Now we are going to create a list of potential stocks to invest in.

Have you ever seen fantasy football? I like to think of stock picking kind of like fantasy football.

A group football fans get together and draft a team of their favorite players. The ones they think are going to take them to the super bowl.

I think of my stock portfolio the same way. I try to pull together a list of the best stocks that I think are going to bring me huge profits.

So sit down and start thinking about your dream team.

List out as many stocks as you can think you may want on your dream team.

Think of brands you absolutely love! You swear by them. These are potential candidates. Think of companies that you just know are going to take off over the next few years.

Think about what you know. I’ve worked in the IT industry for a long time, so I’ve come to know tech. I have a knack for identifying tech companies that are really taking off.

What industry do you work in? Do you have knowledge of what the goto companies are in your industry?

List out at least 10 companies or more if you’d like that you think would be great companies for your dream team.

4. Diversify Your Stocks

Once you’ve got a list of stocks that you think will be star players and will bring in the cash, it’s time to make sure you have a diversified set of stocks.

There are 11 stock sectors. Ideally, your stocks will be spread across different sectors.

(Sectors just means the industries the companies are in.)

  • Financial - Banks, Investments, Insurance
  • Utilities - Electric, Water, Gas
  • Consumer Products Discretionary - Products that we want but don’t have to have 
  • Consumer Staples - Products that are hard to give up but not absolutely necessary
  • Energy - Oil and Gas Companies
  • Healthcare - Hospital, Pharmacy’s, Doctors
  • Industrials - Machinery, Building, Airplanes
  • Technology - Software Companies, Electronics, IT
  • Telecommunication - Wireless Providers, Cable, Internet
  • Materials - Mining, Chemicals, Forestry
  • Real Estate - Residential, Commercial, Retail

Can your stocks fit into several different categories? Try to make sure you have at least 5 different sectors covered if possible.

5. Growth, Growth, Growth

So, how do we know these stocks you picked are going to go up?

Do you know what makes stock prices rise? It’s when more people are trying to buy a stock than trying to sell it. That makes the price rise.

So, what makes investors want to buy stocks in the first place? It’s generally when the company is expected to grow faster than expected.

Companies who are doing well make money. Lots of money. The more money they make, the more they are growing.

Companies report to investors quarterly on how much they made for the quarter. Investors try to guess how much they will make. If the company exceeds that, boom!

The stock usually soars.

So bottom line, you want to find companies that are growing like crazy and have the future potential to grow.

Just like in real estate where they say the most important thing is location, location, location. In stocks, the most important thing is growth, growth, growth!

Review your companies to determine if each quarter their earnings are growing and beating investors expectations.

Basically, earnings are:

Income - Expenses = Earnings

It's also known as net income.

A solid company will have great earnings growth. So take a look at any financial site like finance.google.com and pull up one of the companies you were looking at and check the past 3 years of earnings.

Have they gone up, down, or stagnated? 

If they are going up you may have a good stock. If earnings are going down or stagnating I would avoid them.

6. Find Those Unique Companies That Dominate Their Market

Think about a type of business like coffee. Who is dominating? Who is so unique they don't have much competition.

Here is an easy example, who dominates the coffee market? Starbucks of course. They have created a unique experience and dominate that market.

Who creates an amazing electric automobile that no one has been able to match? Tesla.

These are examples of companies who have dominated their market or niche.

Look at the companies you picked earlier. Are they dominating the market or are they merely a competitor in a sea of the same old companies?

If they are a market leader and don't have much competition in that area, you may have a winner, continue on to the next criteria. If they just a same old, same old company then stay away.

7. Find the Momentum

Momentum can be good or bad. It is a steady increase in the price of the stock over a period of time.

The bad side of momentum is when everyone is jumping on a stock because the price is going higher, but there is no good data backing it up. 

At this point, it becomes a fools game of who is the greater fool. Eventually, you run out of fools and there isn't anyone left to buy and drive the price up and the stock crashes.

Obviously, we don't want to jump on bad momentum, but want we want to find is good momentum.

Some stocks just stagnate even though they have solid fundamentals. When the public notices it’s potential and starts buying, it begins to rise. Now the price is moving upwards at a steady rate. This is the best place to buy in.

If you've found a company with all the previous criteria and has suddenly been increasing in price over a 3 month period that is a good sign of the potential continued increase in price.

The final key to momentum is knowing when to jump off momentum train.

The best strategy is to continue to monitor the previous criteria and the upcoming fine print in the next section. If any of the key criteria you used to choose the stocks changes for the worse. That's a good indicator the momentum is coming to an end and it is time to sell the stock.

8. Don’t Ignore the Details

This section is a little technical but it's great to know this information. It's kind of like the vitals or health of the companies stock.

So to check this information you are going to need to pull up your favorite stock site like finance.google.com.

  • Revenue - This is the total amount of money the company has earned during the time frame you selected. Revenue should be rising over the past 3 years.
  • Earnings - This is the money the company actually kept during the time frame you selected. As I explained in #2 you want to find a company in which the earnings have been growing over at least the past 3 years.
  • Debt - Just like personal debt it can be bad and you don't want the company you buy to have too much. You'll see below how to determine how much is too much in the debt to asset ratio.
  • Equity - This is calculated by taking assets - liabilities. Equity is always good. You'll see how to measure the companies use of equity in the Return on Equity ratio below.
  • Price to Earnings Ratio (P/E) - This is basically the current stock price divided by the earnings per share. This gives you an idea of how much you are paying for the stock versus what they are actually earning. This gives you a comparison number versus other stocks and how expensive they are. By itself, I would not put too much stock in it, but when comparing stocks to other stocks and using all the other data I've given you in this guide you can get an idea how expensive the stock is. The average is 15 - 25. So, if a companies P/E is below that, it tells you that company may be undervalued and is inexpensive compared to other stocks. However, if it is above that it may be a bit overpriced and has too much momentum. I would use this as a guide incorporated with all your other data and not P/E alone.
  • Return on Equity (ROE) - ROE is how much of a return the company is getting on the equity. This means how much money they are making with the money they have. In other words, it shows how well the company is using its equity. It is calculated by the formula Net Income / Equity. This is a great tool to compare stocks. Obviously the more return on equity the better. It's also great to see this ratio growing over time as well.
  • Debt to Asset Ratio - This ratio tells you how much debt they have in comparison to their assets (cash + property). Ideally the less debt the better. This is another great comparison tool to compare companies. .6 debt ratio is considered high and 0 means they have no debt. I try to stick with companies with as little debt as possible.

There are more advanced ratios and chart analysis techniques, but you don't have to use them to get good results. 

These basic techniques have allowed me to beat the market and make significant gains for years. 

If you get started and love it, all those advanced techniques will be waiting once you've got the fundamentals down.

9. A/B Test Your Companies

As with everything else, you’re probably going to have winners and losers. Over time you’ll see which ones are performing well and which ones are not.

I always try to have 5 solid companies who are my core players and bring me in the money. I keep 5 - 10 stocks in my portfolio at any time. 5 of them are my winners and the others are my test companies.

Just like in marketing, you want to always be testing. A/B testing in marketing is a strategy in which you run 2 or more ads and find out which one gets the best results.

I do pretty much the same thing with my stocks. I may buy 10 stocks and by the end of the year, I’ll know which 5 are the winners and which 5 are the losers.

I cut the losers, keep the winners, and then add 5 new companies to test them against my winners.

Once a year (sometimes more often), after running an A/B test. I redraft new stocks. Just like in fantasy football in which new players are drafted each year for a new season, I do the same with my stocks.

If you have a portfolio of 10 stocks. Drop the losing 5 and replace them with new winning stocks. Don’t be afraid to drop the losers and keep the winners.

10. Don’t Stop Contributing

Once you’ve dropped your initial money into your brokerage account, don’t stop contributing. 

Create a schedule and forget about it.

For my Badass Stock Portfolio, I like to contribute $100 every 2 weeks automatically. 

I use Robinhood’s automatic bank transfer to do it, so I don’t even have to think about it. That’s another $2,400 per year to invest and create money for you.

Determine how much money you can put aside for your stock portfolio and automate your investment deposits. This will give you more money to invest and grow that money tree.

11. Rebalance Every Year, There Can Be Too Much of a Good Thing

Your winners are going to grow and sometimes they will grow big time.

It’s a good idea to rebalance your portfolio at least once a year.

No one stock should exceed 20% of your portfolio. Say, for example, one of your winners is Apple. It may be growing faster than your others stocks and become 25% of your total stock portfolio.

That’s too much. Just like in fantasy football, if you’re betting everything on one player and they get injured. You’re in trouble. 

Don’t bet everything on one stock. One big issue with that stock and it could wipe out a significant portion of your portfolio.

At least once a year take some of those profits and invest in new stocks to try and keep a balanced portfolio of winners.

12. Understand How a Recession or Stock Correction Works to Reduce Emotion

Ok, guys, this is where most investors fail. Let’s say you buy some stocks that you believe in and they’re going up. You’re making money!

Suddenly, bad news comes out about economic or foreign policy and stocks start nosediving down. This is where a lot of investors screw up.

Their emotions say, PANIC! SELL, SELL, SELL!

So they do. They sell their stock position and either take away a modest gain or a modest loss on that stock investment.

That is the path to mediocre returns or losses. You are not going to beat the stock market doing that.

History is our best guide to predict how the stock market will react in the future.

Yes, stocks go up and down. That is totally normal, but history shows the stocks move up and down while still moving upward on the trend line.

In other words, over the long term, the stock market always goes up. This makes long-term investing much safer and even easier to predict.

Don’t panic, stay calm!

Create Your Dream Team and Start Investing

If you haven’t already started, now is the time. Open your account and build your team.

Keep an eye on your portfolio. It’s hard not too, once you start making money in the stock market.

Most importantly, have fun! Once you begin to make money in the stock market it’s hard to go back. It’s very exciting to make money from investing rather than trading your time for money.

Hopefully, it will be an exciting and life-changing journey for you just as it was for me!

Action Steps

1. Open an Investing Account

2. Invest Enough Money to Make Good Returns Fast

3. Brainstorm Your Dream Team of Companies / Stocks

4. Diversify Your Stocks

5. Growth, Growth, Growth

6. Find Those Unique Companies That Dominate Their Market

7. Find the Momentum

8. Don’t Ignore the Details

9. A/B Test Your Companies

10. Don’t Stop Contributing

11. Rebalance Every Year, There Can Be Too Much of a Good Thing

12. Understand How a Recession or Stock Correction Works to Reduce Emotion


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DAVID SHEPHERD

CREATOR OF LET'S AUTOMATE YOUR MONEY WITH MY LOVELY WIFE KRISTA


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