Thursday, 16 February 2012

Stock Investment Myth

stuart miles
News Channel or Analyst Myth: Lots of individual investors think one can make money by regularly following news channel and investing based on Analysts recommendation.
Reality: This is how it works. Investors Sit Glued to News Channels eagerly waiting to see what Analysts recommend.  News channels are pretty smart; they would discuss the same topic with at least 10 analysts.

Example: Will Sensex go below 14k? Or It could be Is Suzlon a good buy? 

50% Analysts say Sensex cannot go below 14k they will support their say with few facts and data. Other 50% would say Sensex will go below 14k. Here again Analyst will support their statement by showcasing the slowdown in economy etc etc.
A month later whatever be the sensex Level. News channels are proud to say, it was their channel that did the right Prediction. They would interview only those Analysts who are on winning side.  We have short memory and we forget that the same news channel had interviewed few analysts who were of the opposite opinion. So it like Either Heads or Tails New channel always wins.
Food for Thought: Analysts are smarter than us as they understand Technical analysis. If the prediction is based on technical analysis why is there difference in opinion among the analysts?


Broker Myth: Investing based on your brokers recommendation.
Reality: Have you ever thought, If broker was so smart, why would be slogging for few thousands? Brokers will only be interested in his commission.  If you want to learn the art of making money in stock market then you need to get out of Broker BASED Investment Principle (BBIP). Learn how to evaluate a company.

Penny Stocks Myth: You want Multi BAGGER returns? Invest in Small Caps or Penny Stocks.
Reality: I would like to rephrase it to “You want Multi BEGGER Returns?” Well Penny stocks are very risky and volatile in nature. It is like lottery or Jackpot. You should be very lucky person if one of your penny stocks converts into a Multi Bagger.
Blue Chip or Large companies can give you Bagger Returns. Buy them when they are available at cheap valuation.  If one had invested in Tata Motors in Feb 2009, when the stock was hovering at around 150, the stock zoomed to 1000 in less than 4 years. Is this not a Multi Bagger?
The take away is : Big or Large companies too have potential to return multi bagger returns.
Hope Myth: Investors generally have the feeling the stock that goes down has to come up.
Reality: What goes down will come up one or the other day. This is seldom true.  There are plenty of stocks have fallen from life time high and are trading at life time low. It is like expecting a dead man to come alive.  Let me explain how people think. You invest in stock at 100. This stock crashes down to 60. You tend to think that this is bottom price and plant to buy more to average out.  Many a times it continues to make new low every passing day.  You wait helplessly to see the stock reaching all the way down to 20. Now we convince our self that one or the other day it will go back to 100. Stock has come down by 80%. To recover this 80% loss the stock has to move by 500%.  That is from 20 Rs to 100 Rs. It has to appreciate by 500%. Do we have this patience? How many stocks we hold in our portfolio has the potential to give 500% returns?
Value Buying Myth: Blue Chip available at 52 week Low is value buy.
Reality: Partially True. If the stock is trading low due to economic conditions and not due to weakness in company fundamentals then it is value buy. In case if the drop in share price is due to poor company performance, better stay away. It will continue to make new lows till the fundamentals are set right.

Low Price Myth: Low priced stocks are better than high price stocks.
Reality: This is the biggest mistake investors commit. Just comparing price of two stocks in same sector and picking up the one with lowest price.. Example two infra stocks ABC and XYZ.  ABC is trading at 50 and ZYZ is trading at 110. Investors blindly pick ABC as it is trading at 50. There is always a possibility of Face value difference. If Face value of ABC is 1 and XYZ Face value is 10 then ABC is very expensive in comparison to XYZ. The actual Price of ABC would be 500.

Take away : Don’t just look at price and pick the cheapest one. Look for fundamentally strong company available at cheap valuation. USE P/E,  P/BV to evaluate if it is worth investing in the stock.
Do you have any of these Myth?


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