AVOID THESE STOCKS

 

Today we learn about those stocks that we should avoid. Let’s start



  If I could avoid a single stock, it would be the hottest stock in hottest industry, the one that gets the most favourable publicity, the one that every investor hears about in the car pool or on the commuter train- and succumbing to the social pressure, often buys.

Hot stocks can go up fast, usually out of sight of any of the known landmarks of value, but since there’s nothing but hope and thin air to support them, the fall just as quickly. If you aren’t clever at selling hot stocks, you will soon see your profit turn into losses, because when the price falls, it’s not going to fall slowly, nor is it likely to stop at level where you jumped on. There couldn’t have been a hotter industry than carpets. As I was growing up, every housewife in America wanted wall-to wall carpeting. Don’t invest in any company before research and checking their balance sheet. Beware from these types of so called high growth stocks. Coping has been a respectable industry for two decades and there’s never been a slowdown in demand, yet the copy machine companies can’t make a decent living.

 

BEWARE THE NEXT SOMETHING

Another stock I’d avoid is a stock in a company that’s been touted as the next IBM, the next McDonald’s, the next Intel, or the next Disney, etc. In my experience the next of something almost never is –on Broadway, the best seller list, the National Basketball Association, or Wall Street.

In fact, when people tout a stock as the next of something, it often marks the end of prosperity not only for the imitator but also for the original to which it is being compared. When other computer companies were called the “next IBM,” you could have guessed that IBM would go through some terrible time, and it has. Today most computer companies are trying not to become the next IBM, which may mean better times ahead for that beleaguered firm.

 

AVOID DIWORSEIFICATIONS

Instead of buying back share or raising dividends, profitable companies often prefer to blow the money on foolish acquisitions. The dedicated diworseifier seek out merchandise that is (1) overpriced, and (2) completely beyond his or realm of understanding. This ensures that losses will be maximized.

Every second decade the corporation seem to alternate between rampant diworseification and rampant restructuring. The same thing happens to people and their sailboats.

From investor point of view, the only two good things about diworseification are owning shares in the company that’s being acquired, or finding turnaround opportunities among the victims of diworseification that have decided to restructure.

That’s not to say it always foolish to make acquisitions. It is a very good strategy in situations where the basic business is terrible. The trick is that you have to know how to make the right acquisition and then manage them successfully. If a company must acquire something, I’d prefer it to be a related business, but acquisitions in general make me nervous.

 

BEWARE THE WHISPER STOCK


I get call all the time from people who recommend solid companies for Magellan, and then, usually after they’ve lowered their voice as if to confide something personal, they add: “There is a great stock I want to tell you about.”

These are the long shots, also known as whisper stocks, and the whiz-bang stories. They probably reach your neighbourhood about the same time they reach mine: the company that sells papaya juice derivative as a cure for slipped-disc pan ; jungle remedies in general ; high-tech stuff; monoclonal antibodies extracted from cows; various miracle additive and energy breakthroughs that violate the law of physics. Often the whisper companies are on the brink of solving the latest national problem: the oil shortage, drug addiction, AIDS. The solution is either (a) very imaginative, or (b) impressively complicated.

Whisper stocks have a hypnotic effect, and usually the stories have emotional appeal.

 

BEWARE THE MIDDLEMAN

If any company depend on other entity to run their cycle. Then beware of these types of stocks. Tandon were always on the brink of disaster because they were too dependent on a few clients.

 

BEWARE THE STOCK WITH THE EXCITING NAME

It’s too bad that Xerox didn’t have a name like David's Dry Copies, because then more people would have been skeptical of it. As often as a dull name in good company keeps early buyers away, a flashy name in a mediocre company attracts investors and give them a false sense of security.

 

Next blog is coming about earning analysis.

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Congratulation you take one more step towards your financial freedom.

This summary from Book-“One Up On Wall Street”

 

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