The S&P 500 has gained an average of about 11% each year since its creation in 1923, so why do so many people think investing in the stock market is gambling? I’m continually telling family and friends about the average stock market performance when they ask me why on earth I am playing the exchanges. There are many, many reasons why investing in the stock market is a good idea.
Mainly, investing directly in the stock market is a relatively safe way to gain more returns than most mutual funds, and definitely more than bonds and treasury bills. But three simple indicators that almost anyone can use will weed out the riskiest stocks and help you realize an average gain well above mutual funds, bonds or certificates of deposit. These three strategies are the building blocks that have led to my portfolio return of 40% in the last year, compared to about 30% for the S&P 500.
Taking a look at the forecasts and trends for each industry will help you focus your portfolio on the area primed for the most growth. The last couple decades have been solid for technology stocks, but I see agriculture dominating in the years ahead. Mosaic Co (NYSE:MOS) controls much of the potential in this industry. The company announced recently the addition of 800,000 metric tons per year in additional capacity for ammonia. That adds to the current 500,000 metric tons that is stockpiled at a plant in Louisiana. The addition indicates that the company sees the demand for phosphate increasing. Agriculture is a sector destined for major profits due to global food crises. With world population projected to be 9 billion by 2050, food demand will increase along with profits at agriculture-related companies such as Mosaic Co (NYSE:MOS).
Profit margin
Another way to help separate the good stocks from the bad is look at the profit margin. I always make sure that nearly every company I buy has a profit margin of at least 10%. Anadarko Petroleum Corporation (NYSE:APC) fits the bill. The company tallied an 18% profit margin last year. The firm focuses on independent exploration and production, while owning an equivalent of around 2.5 billion barrels of oil. While the company may be in a better position to profit than other publicly traded businesses, investors should still look at the past performance of the company. Anadarko Petroleum Corporation (NYSE:APC) lost $3.4 billion in 2011 and $108 million in 2009. The company has continued on an unpredictable tend, which makes this stock a riskier play. However, signs that the company is increasing deep-sea oil drilling came in on June 4, when the firm ordered a slew of subsea supplies.
Chart
The chart is another key indicator about whether a company is destined for greatness or ruin. When looking at the chart, I look for great companies that are undervalued. Since the recession, my strategy has included monitoring the pre-recession value of the stock and looking at its price today. While the vast majority of great companies meet or are above their pre-recession prices, a few gems are still available. General Electric Company (NYSE:GE) was priced in the low $40-range leading up to the recession, and then it fell to under $10 per share. The firm has been priced in the $20 range for the last two years. The business is still strong and has a massive amount of potential. General Electric is making acquisitions, which is a sign that the company is in a strong financial position for growth in the years ahead. For example, in May, General Electric Company (NYSE:GE) was approved to buy Lufkin Industries for nearly $3 billion. This helps General Electric to increase its presence in extracting natural gas and oil from shale.
Investing isn’t for everyone
It’s fair to assert that most people feel more comfortable giving their money to a financial adviser than investing it themselves. Many others will happily spill their money into a bank’s mutual fund, which will earn them an average of about 8% per year. In taking a look at many other investment vehicles, the story dims further. To me, investing in the stock market is a no-brainer, but until you feel comfortable with the stock market basics, it’s best to consult a professional.
Phillip Woolgar has no position in any stocks mentioned. The Motley Fool owns shares of General Electric Company.
The article Why Are So Many People Afraid of the Stock Market? originally appeared on Fool.com.
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