Different people have different viewpoints of the question, “how to achieve long-term wealth with low-risk in the stock market?”

Interestingly, the answer is embedded in the question itself, in the shape of four keywords: long-term, wealth, risk and stock.

To become a successful stock investor, one must have a healthy perspective behind these four key components, which is the purpose of this article.

Long-Term

In the context of an investor, long-term means ‘forever’. It refers to an intent to own an asset in the long run, be it a property or stock. As long as an asset is income or cash flow productive, then you are winning.

If you can, imagine stocks as cows. Then, the questions you may want to poner about are:

• Are you in the butchering or dairy farming business?
• Why do you rare or breed cows?
• Is it for their meat or for their ability to produce milk on a regular basis?

If you are a dairy farmer, then your best cows (stocks) should be identified based on their ability to produce milk (profits or dividends) over their lifespan. To a greater degree, you wouldn’t want to butcher your cows (stocks) just for capital gains.

Wealth

As an investor, how you measure wealth can make all the difference. Is wealth about having more money than the next person? Or is it based on one’s recurring productivity of income or cash flow?

How you prioritise the two will subtly determine how you fare when it comes to buying and selling stocks in the stock market.

If wealth is indeed about having more money than the next person, then you may be more motivated to increase your capital from let’s say, RM10,000 to RM20,000.

This is because wealth, in your context, is about accumulation of more money. Hence, this mindset also attracts most people to venture into stock trading.

On the other hand, if wealth is about productivity, you might view stocks based on their ability to produce recurring and increasing income over the long term.

Risk

Risk is often associated with the price fluctuation of an asset. Let’s say, we have two stocks: Stock A and Stock B.

The price for Stock A fluctuates more than Stock B and as such, is considered riskier. This perspective often stems from people who view wealth as having more money than the next person.

This also explains why most people assume automatically that stock investing is risky and requires high risks to to generate higher returns.

However, if you view risks from a banking angle, then you will eventually end up performing a ‘credit assessment’ on your stock portfolio, similar to how a bank assesses your credit score when you apply for a loan.

A banker always assesses your financial strength to ascertain whether or not you are eligible for a loan. Thus, the banker is conducting a fundamental analysis on you to assess if you are their ‘preferred stock’ to invest in.

That being said, do you conduct your own credit assessment prior to purchasing a stock?

Stock

Finally, what is a stock to you? Is it an electronic code that fluctuates in prices every second? Is it a business that has assets which are serving real-life customers?

If you view a stock as an electronic code, then you would be more inclined to trade stocks for greater and quicker capital gains. It is also likely that you will not perform a thorough credit assessment on your stocks.

However, if you view a stock to be a business, then, it will make sense for you to perform a credit assessment on your stocks prior to investing. The reason is simple – you want to own a portfolio of highly profitable businesses.

In brief, as an investor, your credit assessment on a stock would include:

• The business model
• The 10-Year past 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)

In conclusion, a successful stock investor is much like a dairy farmer who owns stocks for as long as it is income productive. In terms of wealth, a good investor would focus on a stock’s ability in producing income for the long term.

When it comes to risk, a successful investor always performs “credit assessments” on an investment before investing. And of course, successful stock investing is built on the perspective that it is a business that adds value to its customers, and 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 first online personal finance course specifically designed for Malaysians, entitled the Money Automation System. He also co-founded many other online financial courses including the Bursa Method, Property Method, Founder Method and REIT Method.