Dec 13, 2010|
Does your money matter?
Do you pick up a 'hot stock' just because people around you have been talking a lot about it lately? Your friends and colleagues tell you about the amazing profits they made on the stock in a short period of time. Greed then gets the better of you. Do you immediately jump on the bandwagon and buy the stock, without any research on the company?
Well, such stocks could entice you for a short while. They may be among the top gainers in your portfolio for a few days. But sooner or later investors realize the damage that they have done to their portfolio by having such spoilt eggs. An example of this type of stock is 'Money Matters' - a company which played the lead role in a recent bribery scam. The stock price kept increasing with rising speculation amongst investors. A brief study of the company's financial history could have warned them of the volatility in revenues and profits. But unfortunately no one seemed to be interested in that.
|Source: BSE, Standalone company results
Well, according to the basic law of gravity, what goes up, must come down. Especially if the meteoric rise in asset prices is not backed by fundamental reasons. The stock of Money Matters touched its highest level in mid- November. Post which it corrected by almost 70% in just a few weeks. Investing based on speculation thus has the potential to not just wipe out your returns but also your capital.
|Source: CMIE Prowess
Let's put this in another perspective.
Suppose you were recruiting someone for a position in your company. Would you hire people just because they had a nice sounding name? Or if someone just told you to hire them. Or, just because you saw them walk on the street outside your office. Ideally you would not.
You would first look at the person's resume. Only if you like what you see would you call the person for an interview. You would also like to compare him with other suitable candidates. In fact, you at a may interview a couple of more candidates before finalising someone. Once you shortlist the candidate you would then negotiate on salary, performance expectations, etc. You would also see if they would fit in well with the rest of your team. Before providing a final offer you would do a reference check to see if your analysis was correct on the candidate. One important reminder to yourself during the entire process would be to select a candidate who would stick with you for the long term. But, when you invest your hard earned salary in a stock do you follow these steps?
Do you look at the company's resume, i.e. financial history? Do you look at a number of potential stocks before zeroing on what to invest in? Once you like the stock do you try and decide what your expectations are from the stock. This would include the returns you expect based on the future performance of the company. This would also include any dividends that the stock would pay. Also in terms of your outflows - you need decide whether the stock price is justified, before committing to buying it. Analyse the company specific and industry risk factors.
Would you then try and see if the stock is a good fit for your portfolio? This would include not concentrating too much of your capital in a single sector. Or putting all your eggs in one basket. Do you also corroborate your analysis with a reference check? Check if the CEO and the top management is ethical. Invest in sectors you understand. This reference check could include very simple things. Suppose you are investing in auto stocks, look around you while driving to see what cars people own. And which ones look new. See what is flying off the shelves at your local supermarket for FMCG stocks. When your friends complain about their telecom provider, listen to what their concerns are.
A final tip would be to invest for the long term. Recruit a stock in your portfolio, versus just investing based on tips or rumours. Since this process of investing does take some time, it doesn't make any sense to shortlist a good company and sell it before it gives you any returns.
Remember these tips next time before putting your money in a stock. Your money does matter!
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