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12/23/08

Stock Investment Errors You Don't Want To Make

1. Putting your money on something you don't understand. So you've heard that your neighbor just had his house remodeled with the profits he made from the stock market. You want your own share of the pie too so you hastily purchase stocks of the first company you saw on the gainers list. It would have been funny if you were Homer Simpson but in reality, you have just made a very unwise decision. Before buying stocks in a company, you should first have a clear understanding of its business model and financial history. The stability of the sector it belongs to should also be taken into consideration. Even good companies with solid businesses could suffer from a nasty devaluation if its sector is in trouble.

2. Becoming emotionally attached to your stocks. It's tempting to hold on to your stocks even when sound financial reasoning tells you to sell them. After all, you've already spent so much time and effort poring over pages of market reports and corporate information until you finally found press releases examples ideal company you want to invest on. You also want to prove that you made the right decision in choosing that company. However, holding on too long to your stocks because of sheer emotional attachment could lead to huge losses. If your stocks have been on a consistent low and there are signs of trouble in the company, then be willing to sell even if it hurts. Remember: you buy stocks to make money; you're not supposed to marry them.

3. Putting all your eggs in one basket. You are not afraid of taking risks but you also don't want to end up penniless. Then your favorite word should be diversification. In building up your stock portfolio, be sure to acquire stocks from all major sectors such as property, industry, submit free press release oil, and services. That way, you prevent your entire investment from going down the drain in case one sector takes a nosedive. A good rule is to limit an investment to 10 percent of your portfolio.

4. Aiming for a turnover overload. The stock market is no place for impulsive buying (and selling). If you're into the habit of buying stocks and selling them after a short period of time with little or no gains to show for it, then writing release broker must be filthy rich with commissions by now. Keep in mind that each trade comes with transaction costs and taxes. If you're not careful, then what profits you have could be easily wiped out by the accompanying costs of your high turnover. You could also miss out on the possible gains of your investment in the long run.


2 comments:

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Dear Friends,
The markets last week reacted to what I call the I.B.U effect. Three stocks covered in last weeks newsletter stole the limelight last week were Infosys Bharti and Unitech. Week on week markets closed down 2.7%. The reason why I avoided Reliance was that it was at best market performer. It makes me surprised how an accounting exercise like Bonus shares can be a Diwali Bonus for Ril shareholders. Reliance turnover in value terms is still in Top 10 in Nifty Index. Moreover the only party that stands benefited is the taxman on the issue of new shares with stamp duty benefits.


Infosys is trading at four quarters TTM Pe of 19.79. Infosys has projected a net profit growth of 4.8% to 4.4%. At best the stock should trade at 16X earnings. For a 5% grower to trade at 20X Forward pe is expensive for me even at current valuations. Last week after the Bharti-Mtn deal when the whole media was upbeat about the telecom sector. I had pointed out “Traders who believed that Bharti will outperform the markets should go and study the subscriber additions and the ARPU of existing telecom operators. I strongly believe that the telecom sector would slowly move towards valuation parameters of power utility.” In last week’s edition. It doesn’t come as a surprise for me that by Friday the markets had adjusted themselves to the new fundamentals of a once sunrise industry. Going ahead as growth fizzles out the stocks will start adjusting to the 8X-12X price band. The stock price movement reflects that over the long term the price is bound to adjust with the fundamentals of the stock and the deviation between the fundamentals and the stock price is zero.

One more distinct observation made last week was that the market would refuse to fall unless it frustrates the last standing bear to the farthest incident. Do note that I personally believe that on an index front we might remain range bound till the liquidity tap fastens or restricts itself going further. Suzlon will be an interesting stock going ahead. Recently company raised 20 mln$ from the issuance of Gdr and Fccb. The company has been going through a rough patch for some time. I fail to understand the logic of the promoters in selling there stake and bring funds raised via stake sell as soft loan for the company. In case the company needed funds then the company could have easily raised funds via equity dilution the way Unitech did. Suzlon still has a debt book of more then 3 billion$. Moreover the appreciating rupee will start hitting the exporter going forward. Tough time ahead for Tulsi Tanti.

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