A frequent question asked by new investors is, “How do I achieve long-term wealth at low risk in the stock market?”

The answer lies in the four keywords, “long-term”, “wealth”, “risk” and “stock”.

Different people have different viewpoints on these terms, which affects how they buy and sell shares. Thus, it is imperative to understand what these mean and how they impact on a stock investor’s decisions.

1. Long-term

In the context of an investor, long-term means forever. It is a commitment to own an asset, whether a stock or a property, as long as it is income-productive.

Imagine stocks as cows. You might view your cows (stocks) based on their ability to produce milk (profits or dividends) over their lifespan.

Ask yourself:

• Are you in the butchering or dairy-farming business?
• Why do you rear or breed cows – for their meat, or their ability to produce milk on a regular basis?

2. Wealth

Which is a more important measure of wealth – to have more money than the next person, or to have regular income or cash flow?

How you prioritise the two will determine what you do when it comes to buying and selling in the stock market.

If wealth, to you, is about the accumulation of more money, you would want to figure out the quickest way to increase your coffers. Stock trading – as opposed to investment – would be a more appealing option.

If wealth is about productivity, you might consider the investment viability of stocks based on their ability to produce recurring and increasing income.

The first is about capital, one-time gains in the short-term. The second is about cash flow in the long-term.

3. Risk

Risk is often associated with the price fluctuation of an asset: “If the price for Stock A has ups and downs that are greater than Stock B, this makes Stock A riskier.” But this is a limited viewpoint.

Consider, instead, viewing risks from the perspective of a banker, who has to manage risk when it comes to lending. The banker will assess financial strength from pertinent documents to ascertain whether or not a person is creditworthy.

In essence, the banker is carrying out fundamental analysis to assess whether a person is their preferred stock to invest in.

So do your “credit assessment” before investing. It is only risky if you do not do your research and due diligence prior to making an investment.

4. Stock

What is stock to you? Is it an electronic code that fluctuates in prices every second? Or is it a business that has assets which serve real-life customers?

If you think it is an electronic code, then you would be more inclined to trade stocks for greater capital gains quickly. It is likely that you will not perform credit assessments on stocks to trade or speculate.

If you view a stock to be a business, then it will make sense for you to perform a credit assessment before investing as you want to own a portfolio of highly profitable businesses. This should include:

• the business model;
• the 10-year financial track record;
• the current financial strength;
• the current or future initiatives to sustain growth;
• valuation ratios (P/E ratio, P/B ratio, and dividend yields).

Conclusion

Going back to the original question, here are some pointers:

• Be a “dairy farmer” and own stocks for as long as it is income-productive.
• Focus on the stocks’ ability to produce income in the long-term.
• Perform credit assessments before making an investment.
• View it as a business that adds value to its customers, not just a code.

This article first appeared in kclau.com.

KC Lau’s first book Top Money Tips for Malaysians has sold thousands of copies. He launched the Money Automation System, the first online personal finance course specifically designed for Malaysians. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.