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Common Stocks and Uncommon Profits

5 Don'ts For Investors

A.Don’t buy young companies:

According to the author, a young company which has just started out is not a good investment option. The reason for this is that a young company has high chances of failing. Fisher preferred to buy companies which had established themselves and had a commercial production line.

 

For example, an investor who purchased Netflix in 2002 would have generated a 10,000% percent return in 15 years. The problem is that in 2001, it was very difficult to predict that Netflix would generate such high returns in a span of just 15 years. 

 

It would be like taking a guess. Guessing will rarely work.

 

B.Don’t ignore a good stock just because it trades “over-the-counter”:

Over-the-counter stocks are those stocks which are not listed in an exchange. There might be good stocks available in the OTC market if we look carefully. The disadvantage of the OTC stocks is that they are illiquid. Generally, bid-ask spreads are high on OTC markets, which means the commissions are high as well.

 

C.Don’t buy a stock just because you like the “tone” of its annual report: 

Do not buy or sell a stock because its financial report sounds positive or negative. Instead, look at the quality of the report. See the accounting choices which have been made. It's the management’s job to make their financial reports sound positive.

 

D.A stock’s P/E ratio doesn’t always show its true picture:

According to the author, a company’s P/E ratio may not show its true picture. A P/E ratio of 20 times does not mean that the company is overvalued. Understanding the nature of a company is very important. A company which keeps launching new products constantly, and if that company is in a high growth industry, it will most likely be a bargain. The P/E ratio, in that case, will not matter.

 

E.Don’t quibble over eighths and quarters:

If you’re an investor and you don’t want to buy large amounts of a stock at once, the best thing you can do is to buy the stock when it's close to your price target.

 

Suppose your price target for a stock is ₹50, and the current price of that stock is ₹51. The logical thing to do is buy this stock for ₹51. It is possible that the price will never reach ₹50. If you want to buy large amounts of a stock, then it makes sense to place the order through a broker. If you place the orders yourself, the price of that stock will surge massively.

 

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