Saturday, January 20, 2018

Dangerous Advice For Beginner Investors....

Courtesy : Investopedia

New investors are bombarded with advice from everywhere. Financial television, magazines, websites, financial professionals, friends and family members all have advice on how to structure your investment portfolio. Beginning investors are much more likely to give credence to investment tips than experienced investors. While the advice is meant to be helpful, it may actually be detrimental to the investment newbie.


Here are five examples of the types of dangerous advice given to beginning investors:

1) "Buy Companies Whose Products You Love"

How many times has someone told you that when investing, you should buy companies that make products you love? This can be a risky and expensive proposition.
For example, let's say you want to buy shares of Apple because you love your new iPhone 4G. You buy shares of Apple at its market price and wait to reap the rewards from all of the iPhone sales. The problem with this strategy is that it fails to take price into consideration. Apple may be a great stock to buy at $200, but it could be a pricey investment at $300.
New investors tend to overpay for companies that they really want to own. This buy-at-any-cost philosophy can leave you regretting your stock purchase at the end of the day.

2) "Invest In What You Know"

Investing in what you know is an old investment axiom. This works well for experienced investors who are familiar with lots of companies in different sectors of the economy. This is terrible advice for the investing novice, because it limits your investments to only businesses that you know a lot about.

What if the only companies you know about are in the restaurant industry or retail industry? You may find yourself overinvesting in one or two sectors. Not to mention the fact that you would end up missing out on some great companies in the basic materials industry or technology sector.

3) "Diversify Your Stock Portfolio"

Diversification is supposed to help protect your portfolio from market drops and control risk. It's a great concept, but proper diversification can be difficult to achieve and expensive to do. New investors have difficulty building a properly diversified portfolio because of the costs. If not using an index fund to diversify, constructing a properly balanced portfolio in stocks requires thousands of dollars and may require buying at least 20 individual stocks.

It can also be difficult for new investors to maintain a balance between being diversified and not being overly diversified. If you aren't careful, you could end up owning 50 different stocks and 50 mutual funds. An investor could easily get overwhelmed trying to keep track of such a portfolio.

4) "Trade Your Brokerage Account"

Since the market crash of 2008, more investors are abandoning a buy-and-hold strategy and turning to short-term trading. Financial television shows and market experts have even been recommending that investors trade their accounts. Short-term trading may work for sophisticated investors, but it can crush the confidence of new investors.
Short-term trading requires the ability to time buy and sell decisions just right. It takes lots of available cash to hop in and out of positions. It can also decimate your entire portfolio because of trading fees and bad decision making. Daytrading stocks is a strategy best left to the experts. 

5) "Buy Penny Stocks"

Emails, advertisements, friends and even family members often trumpet penny stock investing for new investors. The attraction of penny stock investing is that it seems like an easy way to get rich quick, since penny stocks are subject to extreme price volatility. If shares of ABC Company are selling for $1.50 per share, you could buy 1,000 shares for $1,500. The hope is that the stock goes to $3 or more so that you could double your money quickly.

It sounds great until you realize that penny stocks trade in the single digits for a reason. They are normally very flawed companies with large debt burdens and whose long-term viability is usually in doubt. Most penny stocks are much more likely to go to zero than to double your money.

The Bottom Line
As you can see, sometimes investment tips can do more harm to your portfolio than good. One size fits all may work for ponchos and raincoats, but it does not work when it comes to investment advice.

29 comments :

  1. Sir your view on Avantel Limited ur old reco and Wendt India Limited..
    Thanks

    ReplyDelete
  2. Hi VP, any advise on Fiem industries in Auto space?

    ReplyDelete
  3. Sir, How do you see the Capital First and IDFC Bank merger. I added Capital First shares (though price has fallen now).

    ReplyDelete
    Replies
    1. capital first earlier suggested around Rs.200. I hope under the leadership of a capable leader the joint entity will start to deliver once the integration period is over.

      Delete
  4. Dear sir, i want your valuable views about your erstwhile recommendations, 1.Deepak Nitrite and 2.godawari power and ispat, is it a buy at cmp sir?

    ReplyDelete
    Replies
    1. Prefer to hold , both stocks already appreciated more than 5 times from suggested rate.

      Delete
  5. Dear VP sir...................... Some expert on YouTube post a video that market is trading at PE near abt 25 it is somewhat similar as in 2008 and market will crash.... What is your opinion on this

    ReplyDelete
    Replies
    1. P/E is not a constant figure ,it can come down with an improvement in corporate performance.So nothing to comment about taking investment decisions based ONLY ON such digits and figures.

      Delete
  6. Dear Sir,

    Can you please provide suggestions regarding following stocks-
    BSE Limited
    RBL bank
    Balasore ALooys
    Ferro Alloys

    ReplyDelete
    Replies
    1. Sorry . not tracking any of these companies.

      Delete
  7. Dear VP, your view on faze three please.

    ReplyDelete
    Replies
    1. Company just came out of their earlier debt mess , better to give some time to breathe :).Let us observe the business growth for few more quarters and conclude only thereafter.

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  8. sir
    please elaborate on key parameters for "comfortable valuation". is it all about numbers like PE,growth,ROCE in the past ? or it also about assumption with macro environment conditions ? . This will be helpful for learning .Thanks in advance.
    and one more thing sir, is it possible to meet you someday ?

    ReplyDelete
    Replies
    1. While investing in stocks I would prefer to give only minimum attention to the past figures but to concentrate more on future potential and promoters ability to utilize the opportunities in front of them .I am not saying all other methods like P/E or ROCE based investment methods are failure or bad but to stick on a method I am believing . Each and every investors's benchmarks and investment styles may differ.

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  9. Sir, any idea what is the problem with Tanla, invested and in loss? Business model appears good but quarterly numbers are abysmal , management is not able to deliver it seems

    ReplyDelete
    Replies
    1. Telecom companies are facing challenges from multiple angles , this may impact companies like Tanla too.

      Delete
  10. Sir, I look upto your posting to learn about the market dynamics. The wisdom you shared is valuable for this generation and future generations. Thank you very much for this mentoring with out any expectations.

    I wanted your valuable advice on 3i infotech if you are following it . It looks like a major turnaround after 5 years of pain. It posted 105 cr profit and their product ORION recorded 90% increase in sales due to tax regime in GCC countries. They have repaid next one year installment of loan outstanding in advance this year.

    ReplyDelete
    Replies
    1. Not sure how they can service such a massive equity

      Delete
  11. Sir What is your view about Essdee Aluminium

    ReplyDelete
    Replies
    1. As you are aware once Essdee was one of India's largest foil maker for Pharma and FMCG Industry . Unfortunately company faced multiple challenges including labor problems, working capital issues ..etc . All of their factories are closed down for past few years . As per the information available in public domain , company taking efforts to restart operations. In latest Annual report ,Chairman's statement mentioned their expectation about the time frame within which they are hoping to restart operations. Whether they can keep their promises or not is big question on two grounds , 1) Integrity of promoter - whether genuinely taking efforts or just giving promise ..etc 2) Even promoter is working with the aim to reopen, sometimes reasons beyond their control may create problems and delays . In nutshell , there is no clarity whether things will move as they mentioned in AR , but this time they dare to mention a time frame for re-opening which is something positive . I hope ,if they can re-open Essdee is still a viable business and long way to go.

      Shares of companies going through such situations may turn as multi baggers if everything happens as per our expectation but if it not happening we may loose even our entire capital.

      Disc: Holding Essdee ,hence my views may biased

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  12. Replies
    1. Thanks and Happy Republic Day to all my friends

      Delete
  13. NAMASTEY SIR,

    How do you like paper stocks..paper pricing are increasing..and china ban on waste will help indian companines to raise prices which will add in the margin..all stocks are still available at a decent valuation..good divident paying sector..and now looks good growth in future in my view..how do u like sir this sector..

    ReplyDelete
  14. Dear VP, your views on Alembic ltd please.

    ReplyDelete
  15. VP sir
    any idea about yuken ? how do u see its future. intense tech , if you can give your valuable inputs

    thanks

    ReplyDelete
    Replies
    1. Yuken suggested at Rs.140 few years back. Neutral at CMP Rs. 4600

      http://value-picks.blogspot.in/2010/03/yuken-india-ltd-quality-pick.html


      Delete
  16. Sir your view about Intense Technology, ITL, Panacea Bio Tech, Hindustan Food

    ReplyDelete

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