Avoid Bad Stock Investments - Set Realistic Goals with Safer Stocks
Investing is rather like a game of snakes and ladders it has its ups and downs depending on whether you land on a snake or the first rung of a ladder leading to a pot of gold. Of course its your choice, and your decision, and like most thinks in life its about opportunities, choces and risks. This article is about some common sense tips for spotting the telltale signs of a dubious investment (the snakes tail!). Topics to be covered include:
- High Returns
- Hard Sell
- Smoke and Mirrors
- People Power
- This time Its Different
- Big Promises
- Reading the Charts
- A Sure Thing
All investors have been tempted by them - The Sure Thing! Double Your Money Now! You can't Go Wrong!. Many investors have been burnt by them. They seem to be fabulous options time but end up leaving the investor on the slippery slide to seeing their funds go up in smoke.
Now that the economy has started to pick up its time to review how to detect the shoddy investment options - What to look for, How not to be burnt.
So, can do you spot an investment lemon before you plunge in head-first your hard-earned dollars?
The old adage that: ''if it looks too good to be true, it undoubtedly is,'' still applies and is a good principle to go by.
Lets look at some of the hollow and flimsy promises that should trigger warning bells and smoke detectors to stop you burning your money.
There is no need to shift your sights down to only focus on investments that offer the lowest returns.
However, a sure sign of scams and dud investment options is that they mostly offer returns high above the market average and usually claim to be very low-risk.
The principle of RISKS, RETURNS, TRACK RECORD - choose TWO applies.
- higher returns generally come with higher risk
- good track records for established companies generally mean lower risk and lower returns
- new companies with new innovative products offer high returns, but at high risk and no track record of being able to deliver their potential.
The key is to compare returns from similar investments in order to get a sense of what to expect from various strategies, asset types and areas of investment. You need to compare apples with apples.
A blue-chip investment could offer a greater return with higher risk than a bank deposit but that doesn't mean the investment is a dud.
However, a secure debenture offering a similar return on investment to that of the blue-chip share sounds dodgy.
There are various guides that show risks, variability, indicative returns and failure probabilities for different types of investments, so that you can find out what to expect. (see the image). This also helps to identify claims that sounds too good to be true.
The Hard Sell
If the offer is a ''once-in-a-lifetime'' offer with a short time limit - you will probably be better off turning your back and running away. Stated limit of 'only two left, hurry before the offer closes today' is a classic way of sucking you in. So beware!
Take time and always get advice before investing, particularly if you want to make a substantial investment. Consider paying for advice if you know very little about the company and what they are offering.
Publicity blitzes can also be a warning sign of companies clambering for money to try to keep them afloat. Don't be fooled by the fact that they are spending money on advertising.
Smoke and Mirrors
A good principle is "If you don't understand it, don't invest in it". This is another key rule to avoid duds. This applies both to the company and to new innovations. They may have an exclusive patent on a new product, but there is a long a hazardous journey ahead before they may be making profits. Good ideas and not sure things.
Also be wary of investments that claim magic formulas or instruments. Always check them out first as many people have been burnt by these schemes, including many tax saving devices. Also beware of complexity particularly if you have little experience or don't fully understand the details. A good rule of thumb is not to buy something until you can confidently explain, simply and easily to an associate what it involves and how it will generate the returns.
Get someone with the expertise to explain whether the complexity is real or is merely hiding something.
Beware of investments linked with prominent sports persons, media stars or former political leaders. These people are paid as bait to appeal to investors. These people may have little investing experience and their recommendation is often worthless and designed to deceive.
It is the people running the investment who are crucial, and these are the people you should do you homework about. Check to ensure they are proven managers or investors with an established track-record of success and a glowing profile, not just marketers.
Changes to the Rules and Principles
Beware when the promoters attempt to claim that the investment is ground-breaking because is does not follow the old investment rules and principles. During the dotcom bubble many people were hood-winked by claims that company earnings did not matter any more. While this may have applied during the speculation phase it is dividends and earnings that pay off for long term investments.
Although it sounds boring and irksome do your homework is a necessity to avoid the scams and lemons, particularly for an investment type or area that you are unfamiliar with. These days using the internet it is relatively easy to get a copy of the prospectus or lots of other documents about the company. There are also lots of reviews and investment advice on the various websites that provide excellent information and rating concerning the prospect.
You need to ensure you get real documents and reports and not just promotional blurbs. You also need to be able to understand it to make the right decision. Don't be hoodwinked by the promotional blurb. Do your own research, find the boring stuff, read and evaluate it. Don't be fooled by the weight of stuff available - it may all be lies. If in doubt see advice to clarify the information and fully understand it before proceeding.
The investments industry is as just as prone to fads and fashion as any other industry. History is strewn with investments launched at the peak of the market to take advantage of fashion and to get on the band-wagon. Just because it is popular does not make it good, particularly after the fashion has peaked. It is better to examine at what has been performing moderately well, do your research to find the 'next best thing' than to hook onto a fashionable stock. Look at the cycles for established companies that are due to turn around.
Beware of fads and keep them at arm's length until you have done your homework. Work hard to substantiate the predicted surge for a company that has been claimed to be the 'next best thing'.
Look out for investment opportunities that research shows simply can't meet their claims. This often applies to decision to diversify your investment. The new promising area may be a trap. Look for investments based on reality rather than those with big hollow promises.
The Sure Thing
Sure things are mirages - they don't really exist. If they were real they would have all been gobbled up long ago. There is no such thing as zero risk. Anything promoted as a sure thing is likely to have real and obvious risks.
Focus on Mistakes not Missed Opportunities
Most people waste too much time dwelling on why they about missed opportunities, rather than their mistakes which are costly and should provide lessons for the future. It is always easy to be wise after the fact. Missed opportunities are winners selected after the race has been run. The best investment outcomes come from choosing opportunities that leaves lots of options. Investment outcomes are driven by what you actually do, not by what you don’t do. It is always hard to work out why you didn't choose a stock that took off because you always view the past with rosy colored glasses
Countless books have been written about indicators and how they can be used to select stocks to buy.
For a promising new indicator see:
For a simple tool for choosing positive cash flow investment properties see:
© 2012 Dr. John Anderson
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